SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                   FORM 10-KSB

(Mark One)


/ X /    ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997
                          -----------------

/  /     TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from ________ to _______________

                         Commission file number 1-13587

                           CROSSZ SOFTWARE CORPORATION
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


                Delaware                                  94-3087939
     --------------------------------              -----------------------------
     (State or other jurisdiction of               (IRS Employer Identification
      incorporation or organization                         Number)



            60 Charles Lindbergh Boulevard, Uniondale, New York 11553
--------------------------------------------------------------------------------
           (Address of Principal Executive Offices)           (Zip Code)

       Registrant's telephone number, including area code: (516) 228-8500
                                                           --------------
          Securities registered pursuant to Section 12(b) of the Act:

                                      None

          Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.001 per share


                  Indicate by check mark  whether the  Registrant  (1) has filed
all  reports  required  to be filed  by  Section  13 or 15(d) of the  Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter  period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.           Yes /X/ No / /


<PAGE>
                  Check  if there  is no  disclosure  of  delinquent  filers  in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be  contained,  to the best of the  Registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. /X/

                  State the issuer's  revenues for its most recent  fiscal year:
The  issuer's  revenues  for the  fiscal  year  ended  December  31,  1997  were
$1,012,159.

                  The  aggregate  market  value  of the  voting  stock  held  by
non-affiliates of the Registrant computed by reference to the price at which the
stock was sold on March 2, 1998 was approximately:  $13,858,805.  Solely for the
purposes of this  calculation,  shares  held by  directors  and  officers of the
Registrant  have  been  excluded.   Such  exclusion   should  not  be  deemed  a
determination  or an admission by the Registrant that such  individuals  are, in
fact, affiliates of the Registrant.

                  Indicate  the  number  of  shares  outstanding  of each of the
issuer's classes of common stock, as of the latest practicable date: At March 1,
1998, there were outstanding  5,119,807 shares of the Registrant's Common Stock,
$.001 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

                  Certain   portions  of  the   Registrant's   definitive  proxy
statement to be filed not later than April 30, 1998 pursuant to  Regulation  14A
are  incorporated  by reference in Items 9 through 12 of Part III of this Annual
Report on Form 10-KSB.

                  Transitional Small Business Disclosure Format (check one):

                  Yes /   /  No / X /



<PAGE>
                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS



Company Overview

         CrossZ Software  Corporation  ("CrossZ" or the "Company")  develops and
markets  proprietary  business   intelligence  software  solutions  that  enable
business managers to make strategic  decisions,  leveraging  existing  corporate
data. Through the evolution of technology,  businesses  operating in transaction
intensive  industries,  such as  telecommunications,  retail and  banking,  have
dramatically  increased  their ability to gather and store large amounts of data
generated  from  various  sources.  Such  data  contains  information  that,  if
extracted  effectively  and  efficiently,  can  be  used  to  enhance  strategic
corporate development.  While companies have invested heavily in capturing data,
they have only recently begun to focus  significant  resources on the management
and  analysis  of such  data;  consequently,  the data  gathering  and  analysis
industry is experiencing  significant growth. The Company developed its products
in  response  to the need by major  corporations  to  analyze  these  increasing
volumes of data.

         In the third quarter of 1996, the Company  shifted its focus from using
its proprietary  technologies to provide contract data analysis services, to the
sale and support of its proprietary  products,  thereby enabling customers to do
their own analysis. To date, the Company has realized limited sales.

         The Company was  incorporated  in Delaware in 1997 and is the successor
by   merger  to   CrossZ   International,   Inc.,   a   California   corporation
("CrossZ-California"),   incorporated  in  1989.  Unless  otherwise   indicated,
references to the Company also include its predecessor.

Industry Background

         Data marts are component technologies in the "Business Intelligence" or
more broadly, the "Data Warehousing" market. International Data Corp. ("IDC"), a
leading technology  consulting/research  company, estimates that the size of the
data warehousing  software market will increase to over $5.0 billion by the year
2000, with an annual compound growth rate of approximately 30%. The stimulus for
this growth is the exceptional  returns on capital experienced by companies that
have  invested  in data  warehousing  and related  technologies.  IDC studied 62
companies that invested an average of $2.2 million each in data  warehousing and
found that the average return on investment after three years was 401%.

         There are generally  three  components to an  enterprise-wide  business
intelligence system:



<PAGE>
         - Data warehouse: where the unprocessed corporate data is stored in one
place.  Data warehousing  involves the controlled,  periodic loading of selected
historical data from various databases into a central repository in a summarized
and  standardized  format that is made available to users on a read-only  basis.
This  approach  provides  users  with  better  access  to  critical  data in the
organization's  relational database management systems ("RDBMS"),  but users are
not generally  familiar  enough with  database  syntax to extract data from data
warehouses without assistance from information technology ("IT") personnel.

         - Data  mart:  subject-specific  subsets  of  the  data  warehouse.  An
advanced  form  of  data  mart  contains  pre-calculated  answers  stored  in  a
multidimensional data mart known as a data cube.

         - Data analysis:  accessing  information and discovering and extracting
hidden patterns or trends from databases and data marts.

         Despite  the  size  of this  market,  and the  strategic  value  of the
"business  intelligence"  available from corporate  data,  businesses  developed
their  information  systems  solely to support  transactional  data  processing,
collecting  and  storing  the data  necessary  to  facilitate  such  processing.
Therefore,   data  storage   methods   designed  in   contemplation   of  narrow
transactional goals are being burdened with the new goals of strategic analysis.
Such  systems  do not fully  address  the need to  transform  data  into  useful
information.

         In the business  intelligence  area,  RDBMS are most frequently used as
data  repositories,  both  for  historical  data as a "data  warehouse"  and for
analytical  data as a  "datamart."  RDBMS are tuned to optimize  support of high
volume on-line transaction  processing ("OLTP")  applications such as data entry
and do not support the extraction and analysis of that data.

Limitations of Traditional On-Line Analytical Processing Products.

         Although a data  warehouse  is useful,  because it contains  all of the
data that  will be  analyzed,  its  immense  size  makes  business  intelligence
analysis  inefficient  and  unwieldy.  Within any data  warehouse  there will be
extraneous  data (such as data related to the goal of the analysis) that must be
disregarded in any specific or particular analyses. For example, if a company is
trying to determine  the most  relevant  factors in retaining  its customers for
repeat  purchases,  certain elements of each customer's data profile will have a
relatively high correlative value, such as income,  gender or occupation,  while
other elements will have a relatively low correlative  value, such as first name
or social  security  number.  A data  warehouse  contains all the data elements,
however,  it does not contain the additional  information  necessary to identify
those data elements relevant to a business goal.

         The response to the  inefficiencies  of the data warehouse has been the
development of the data mart. However, traditional data mart technology is still
based on the relational  model employed in the data warehouse and often does not
present that data in a fully  transformed  form most suitable for  analytical as
opposed to storage purposes.

                                       -2-

<PAGE>
         The Company  believes  enterprises  are searching for ways to transcend
these limitations,  to develop data marts that more efficiently support Business
Intelligence   analytical  techniques,   in  less  time,  with  a  more  precise
correlation between data mart content and the user's business objectives. At the
same time,  such  product  must use  existing  hardware and systems and minimize
impact on critical IT resources.

         The  Company   believes  that  its   QueryObject   System  provides  an
enterprise-wide   solution  to  the  problems  of  first  generation  data  mart
technology limitations.

QueryObject(TM) System.

         QueryObject  System employs  advanced  mathematics  to create  compact,
portable and accurate  representations of data sets, called  QueryObjects,  from
the data repository. In real-world applications, a QueryObject System-based data
mart can be tens,  hundreds or even  thousands of times  smaller than the source
data,  thereby making  terabyte-class  databases  small enough to transport on a
standard laptop. QueryObject System technology can reside on mainframe, midrange
(UNIX) or Windows NT systems.  In October  1997,  the Company began to implement
full-scale  marketing  of  QueryObject  System.  QueryObject  System  previously
required certain consulting services and was promoted selectively through direct
sales  channels,  at several  industry  trade shows,  and to potential  business
partners.  The current  release of  QueryObject  System has  reduced  consulting
requirements and is capable of running on additional UNIX operating  systems and
the Windows NT operating system.

         The Company  believes  that  QueryObject  System  offers the  following
advantages over conventional data marts:

         o         Plug and Play with Raw Data:  QueryObject  System  allows the
user to extract  virtually  unlimited amounts of raw data directly from existing
OLTP and other  systems,  without the need to aggregate  and then  summarize the
data.

         o         Fresher Data:  Performing a full scan on a data  warehouse to
create a data mart is time  intensive,  consumes CPU resources,  and renders the
warehouse  virtually  inaccessible to users with other  purposes.  In fact, most
businesses  find it  difficult  to perform more than one full scan on their data
warehouse  in a day and  often  require  a week or more to  create a data  mart.
QueryObject  System was designed  specifically for high speed data mart creation
without the management overhead and negative performance implications associated
with data warehouses and other conventional data repositories, allowing users to
create  dozens of data  marts in a single  day.  Moreover,  because  QueryObject
System  technology  can reside on MVS, UNIX or Windows NT servers,  the user can
create  the data mart on the system  that makes the most sense for the  business
and insulate  mission  critical  applications and databases from the performance
degradation normally associated with full database scans.

         o         Lower  Cost:  As a result of their  ability  to load raw data
directly into QueryObject System,  users can reduce or eliminate  time-consuming
work such as extracting, cleaning,

                                       -3-

<PAGE>
normalizing,  formatting  and  summarizing  data  before  loading it into a data
warehouse.  In addition,  large amounts of operational data can be preserved for
future analysis at far lower cost than a data warehouse.

         o          Greater   Scalability  and  Speed:   The  Company   believes
QueryObject  based  data  marts  contain  more data in less  storage  space than
traditional  data  marts such as Arbor  Essbase  and  Oracle  Express.  A single
QueryObject  can contain  hundreds of millions of records,  tens of thousands of
values in each field or column and billions of potential query answers.  The use
of proprietary  algorithmic  equations  allows  QueryObject-based  data marts to
store more data in a fraction of the storage space needed by  conventional  data
marts. Even with data marts that measure in the hundreds of millions of records,
the retrieval can often be executed in seconds or less.

         o        Greater Multi-User Support: QueryObjects can support unlimited
numbers of concurrent  users since all possible  answers to all possible queries
are contained  therein,  and impose  virtually no degradation on processing,  in
contrast to  conventional  data marts that consume  large  amounts of processing
power in computing potential answers.

         o        Greater  Mobility:  When business  intelligence was a function
confined to a small cadre of analysts and  specialists,  it was  acceptable  for
business  intelligence  systems  to  reside in a single,  central  location.  In
contrast,  since QueryObjects can reside on desktops,  laptops, and Web servers,
or be  distributed  over local area  networks,  they allow  businesses to deploy
complex  data  marts to  thousands  of users in an  enterprise,  using  existing
information technology infrastructure.

The CrossZ Strategy

         The  Company's   objective  is  to  establish  the  QueryObject  System
technology  as a ubiquitous  data mart  standard for  providing  information  to
business  intelligence  applications.  Key  elements of the  Company's  strategy
include:

         Establish Technology Leadership.  The Company has developed a number of
technologies  specifically  to meet the  scalability,  capacity,  usability  and
functionality requirements of data mart software. In particular, the Company has
developed a proprietary high performance mathematical algorithm suite to compute
and  represent  all possible  answers,  univariates,  uniques and  intermediates
across very large databases.  These answers are stored in highly compact formats
that do not require  significant  server memory or  processing  power to provide
instantaneous query response. The Company intends to continue to develop what it
believes  are  innovative  technologies  and  features to address  the  specific
business  requirements of data marts in the areas of  performance,  scalability,
data integrity,  system administration and decision analysis  capabilities.  The
Company  intends to continue to invest in its technology in order to enhance its
existing data mart products.


                                       -4-

<PAGE>
         Develop  Strategic  Relationships.  To  accelerate  the adoption of the
QueryObject System as a standard platform business intelligence application, the
Company  has  begun to form  strategic  relationships  with  many  providers  of
business intelligence  software  applications,  tools and services.  The Company
believes  that its  strategic  relationships  with  hardware and other  software
vendors are a key part of its strategy to establish a leadership position in the
business  intelligence data delivery market. The Company has established license
agreements  and  VAR  relationships  with  Amdahl  Corporation,  Hewlett-Packard
Company,  APlus Technologies,  GM Group (GM Group is not affiliated with General
Motors Corporation),  IBEX Corporation SA, Empower  Geographics,  Inc., STRATOS,
Strategic Tools & Services and Worldnet Consulting, SA. In addition, the Company
has a joint  development  and  marketing  agreement  with  Siemens  Pyramid  and
co-marketing programs with several companies including Brio Technology, Inc. and
Siemens Nixdorf Information Systems AG.

         Expand Open Systems Approach.  The Company seeks to maximize the market
for its products by designing them to adhere to industry standards, which allows
the sharing of data across  platforms  and  software  applications.  QueryObject
technology operates with a wide range of third-party  front-ends,  databases and
operating  systems  via an open  architecture  that  supports  Microsoft's  open
database  connectivity  (ODBC) and object  linking and embedding  database ("OLE
DB") standards. The Company believes that its open systems approach represents a
competitive  advantage versus  competing  solutions that are more proprietary in
nature, and as such intends to continue to adhere to industry standards.

         Leverage Existing  Investments in Information  Technology.  The Company
believes that it has designed QueryObject System to take advantage of customers'
existing IT investments,  thereby  accelerating the acceptance of such software.
QueryObject  System is  designed to leverage  investments  in personal  computer
hardware and software and to integrate data from existing relational  databases,
legacy  repositories  and emerging data  warehouses.  The Company also leverages
third party-based consulting services and distribution capabilities to enable it
to focus on providing  industry  leading  business  intelligence  data  delivery
software.

         Target  Horizontal  Markets/New  Applications and Markets.  Because the
delivery of relevant data to business  intelligence  applications  is a critical
corporate  function in a wide variety of industries,  the Company  believes that
its  solutions  are  potentially  applicable  in a broad range of  markets.  The
Company is  currently  targeting  customers in  financial  services,  insurance,
telecommunications, retail and health care. The Company's strategy also includes
converting  customized   applications  it  develops  as  proofs-of-concept  into
products for sale to specific market segments.

         Provide Superior Customer Service.  The Company believes that providing
superior  customer  service is critical  for  customer  success.  The  Company's
strategy is to deliver  technology  and  services  that enable its  customers to
implement  quickly  and  cost  effectively   integrated  data  mining/data  mart
applications.  The Company provides its customers with a comprehensive  array of
services, including software updates, documentation updates, product maintenance
and

                                       -5-

<PAGE>
emergency response. The Company intends to maintain its focus and to continue to
invest in service and support to extend its customer service advantage.

         Expand Sales and Marketing Capabilities.  The Company intends to expand
its sales and marketing capabilities, both domestically and internationally,  by
increasing the size of its direct sales  organization and developing an indirect
channel of distributors such as original  equipment  manufacturers  ("OEMs") and
value-added resellers ("VARs"). During 1997, the Company opened an office in the
United Kingdom to enter the European marketplace.

Products

         The Company's  QueryObject  System is a highly  scaleable and efficient
solution for providing business intelligence applications and users with all the
relevant information from corporate data.

         QueryObject System

         QueryObject   System  is  a  powerful  OLAP  data  mart  solution  that
transforms   mainframe   size   databases   into  highly  compact  and  portable
mathematical  representations  that fit onto standard PC laptops.  The following
table lists the QueryObject  System product line by configuration  and operating
system:

--------------------------------------------------------------------------------
                         Product            Configuration      Operating System
                   -------------------------------------------------------------
Basic System       QueryObject Voyager         Client        Win 95/NT
                   -------------------------------------------------------------
                   QueryObject DBA             Client        Win 95/NT
                   -------------------------------------------------------------
                   QueryObject Designer        Client        Win 3.1, 95/NT
                   -------------------------------------------------------------
                   QueryObject Engine          Server        MVS, UNIX, Win NT
--------------------------------------------------------------------------------
Optional Modules   QueryObject Open            Client        Win 3.1, 95/NT
                   -------------------------------------------------------------
                   QueryObject Viewer          Client        Win 3.1, 95/NT
                   -------------------------------------------------------------
                   QueryObject Server          Server        Win NT, UNIX
================================================================================

         QueryObject  Voyager  ("Voyager") is a data mart  prototyping tool that
uses advanced data mining  techniques to help the user rapidly design data marts
best suited to answer its  business  question.  Voyager  consists of data mining
applications that utilize multiple concurrent pattern recognition  algorithms to
analyze data from multiple sources throughout an enterprise, including data from
RDBMS, data warehouses and other data repositories, and to automatically design,
prototype  and compute the economic  value of a data mart.  The Voyager  product
operates on Windows 95 or Windows NT.


                                       -6-

<PAGE>
         The principal functions of Voyager include:

         -        project set-up and management;
         -        data usability;
         -        business goal definition;
         -        correlation ranking of all useable input  variables/columns of
                  the  business  goal;
         -        multiple concurrent algorithm data mining;
         -        integration  of data mining  results with a  QueryObject  data
                  cube created on the fly;
         -        data  visualization  functions for economic value  measurement
                  and return on investment; and
         -        machine  readable  output  of  the  data  mart   specification
                  "blueprint" for direct importing into the QueryObject engine

         While  initially  intended as a stand  alone  product,  results  from a
recent market test indicate that  Voyager's  main value is as a component of the
QueryObject  System.  The Company therefore does not intend to market Voyager on
its own but rather as in integral part of the QueryObject System.

         QueryObject DBA (Data Base Administrator)  provides administrators in a
Windows  based  environment  with a tool  to  manage  the  process  of  reading,
synchronizing and staging source, atomic level data in QueryObject System. Using
standard drag and drop actions,  data  administrators  can map their source data
into the QueryObject System repository,  the QueryObject Ready File. The Company
believes that  QueryObject  DBA users benefit from working with a graphical tool
that understands the complexities of both legacy and warehouse data.

         QueryObject  Designer  enables  end users to design and build their own
QueryObjects.   Working  in  a  familiar  Windows   environment,   users  create
QueryObjects by selecting a subset of the fields from the QueryObject Ready file
using a drag and drop interface. The Company believes that the end user benefits
from an environment that requires no programming,  gives a visual representation
of the QueryObject, and is able to process hundreds of millions of data records.

         QueryObject  Engine is designed to work with large  quantities of data,
reads a variety of data formats and  processes the data first into an analytical
repository,  and then  into  multiple  QueryObjects.  From  this  staging  area,
multiple  QueryObjects  are produced in an efficient  manner on the server.  The
Company  believes that users are protected from the server  environment by using
QueryObject Voyager, QueryObject DBA and QueryObject Designer, yet they gain the
power of a server behind their business intelligence system.  QueryObject Engine
runs on a wide variety of server  platforms from MVS to UNIX to Windows/NT.  The
resulting  QueryObject can be moved to a user's individual  personal computer or
managed by the QueryObject Server.

         Unlike  other data mart systems  that  require  significant  amounts of
preprocessing and data aggregation,  QueryObject Engine is able to perform these
tasks automatically for each QueryObject.  The Company believes that the ability
to store and build a QueryObject from detail

                                       -7-

<PAGE>
level data  allows the user to  explore  his data  without  the  constraints  of
pre-aggregated  data sets that might not  represent  the data in the manner that
the user requires for a particular business challenge.

         QueryObject  Open  contains  both the ODBC and OLE DB  interfaces  that
allow end users to work  within a  familiar  environment  as an  alternative  to
QueryObject Viewer.

         QueryObject Viewer is a  multidimensional  database browser that allows
users to segment and filter their  database.  Where other tools limit the number
of dimensions a user can analyze, or force the user to navigate predefined drill
down paths,  QueryObject Viewer allows the user full access to the data for open
ended and wide-ranging  exploration.  QueryObject  Viewer features three display
modes,  including  spreadsheets and graphics,  which enable a user to select the
interface type with which he is most  comfortable.  Using standard  Windows drag
and drop methods, a user can customize his view of the data. Additionally,  data
can be moved into other standard Windows packages.

         QueryObject   Server  allows  the   enterprise  to  locate  and  manage
QueryObjects on a centralized server infrastructure. QueryObject Server provides
enhanced security and performance across multiple  QueryObjects.  Users may also
download QueryObjects from the server to their individual personal computers.

Sales and Marketing

         The Company  markets and sells  QueryObject  System  through its direct
sales  organization  and intends to increase  the  proportion  of sales  through
indirect  channel  parties  such as VARs and  OEMs.  The  direct  sales  process
involves the generation of sales leads through direct mail and  telemarketing or
requests for proposal from  prospects.  The Company's field sales force conducts
multiple  presentations  and  demonstrations  of its products to management  and
users at the  customer  site as part of the direct  sales  effort.  Sales cycles
generally range from six months to nine months or longer.

         The Company's  sales,  marketing and related  customer support services
organization  consisted of 27 full time  employees as of December 31, 1997.  The
sales staff is based at the Company's corporate  headquarters in Uniondale,  New
York and at field sales offices in the metropolitan areas of Chicago, Miami, and
London,  England. To support its sales force, the Company engages in direct mail
solicitations, telesales and public relations and presents its products at trade
shows.

         The Company  employs sales and technical  personnel who are teamed with
an inside sales  specialist to support a designated  account  territory within a
specified  geographic area. The team is responsible for creating and maintaining
local partner  relationships  and  resolving  channel  conflicts.  To ensure the
appropriate level of channel support,  the direct sales force is compensated for
sales that are made through  indirect  channel  partners and those that are made
directly to end

                                       -8-

<PAGE>
users. A separate  partnering and business  development  function is responsible
for the  recruitment  and  maintenance  of OEMs and national and global VARs and
business partners.

         The Company believes that a high level of customer support is important
to the successful  marketing and sale of  QueryObject  System.  Maintenance  and
support  contracts,  which are typically for twelve months, are offered with the
initial  license,  and  may be  renewed  annually  at a cost  equal  to a  fixed
percentage  of the total  license fee paid.  Telephone  hotline  support will be
complemented  by an  internet  site that  provides  an  interactive  forum and a
repository for technical tips and skills.

Research and Development

         The Company  believes that its future success will depend in large part
on its ability to maintain and enhance its  leadership in business  intelligence
software  technology  and develop new products  that meet an expanding  range of
customer  requirements.  The Company's research and development  organization is
divided into teams  consisting of  development  engineers and quality  assurance
engineers.  The market  addressed  by the Company is very  sensitive  to product
quality and therefore the process is aimed at continuous  improvement of product
quality.   The  product   definition  is  based  upon  a  consolidation  of  the
requirements   from  existing   customers,   from  technical  support  and  from
engineering.  These are prioritized by the Company's  management to fit business
priorities and to meet the Company's vision.

         The  market  for the  Company's  software  is  characterized  by  rapid
technological  change,  frequent new product introductions and evolving industry
standards.  The  introduction  of products  embodying new  technologies  and the
emergence of new industry  standards can render existing  products  obsolete and
unmarketable. Therefore, the life cycles of the Company's products are difficult
to  estimate.  The  Company's  future  success  will  depend upon its ability to
enhance on a timely  basis its  current  products,  develop  and  introduce  new
products that keep pace with  technological  developments and emerging  industry
standards and address the increasingly sophisticated needs of its customers.

         As of  December  31,  1997,  the  Company's  research  and  development
organization  consisted of 16 full time  employees.  The Company  also  utilizes
independent contractors located in Europe for its development activities. During
1997 and 1996, research and development  expenses were $2,523,127 and $1,791,597
or 249% and 94% of total  revenues,  respectively.  The Company will continue to
commit substantial resources to research and development in the future.

Proprietary Rights

         The  Company  relies  primarily  on  a  combination  of  copyright  and
trademark  laws,  trade  secrets,  confidentiality  procedures  and  contractual
provisions  to protect its  proprietary  rights.  The Company also believes that
factors such as the  technological  and creative  skills of its  personnel,  new
product  developments,  frequent  product  enhancements,  name  recognition  and
reliable  product  maintenance are essential in  establishing  and maintaining a
technology leadership position. The

                                       -9-

<PAGE>
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection.

         The Company currently has several registered  trademarks,  and may seek
additional  legal  protection for its products and trade names.  The Company has
invested  substantial  resources in  registering  the  trademarks and developing
branded  products and product  lines.  There can be no assurance  that the steps
taken by the  Company to protect  these  intellectual  property  assets  will be
sufficient  to deter  misappropriation.  Failure to protect  these  intellectual
property assets could have a material  adverse effect on the Company's  business
operations.  Moreover, although the Company is not aware of any lawsuit alleging
the Company's  infringement of  intellectual  property  rights,  there can be no
assurance  that any such  lawsuit  will not be filed  against the Company in the
future or, if such lawsuit is filed, that the Company would ultimately prevail.

         The Company  currently  has no United States  patents or  corresponding
patent applications  pending elsewhere.  Furthermore,  there can be no assurance
that others will not  develop  technologies  that are similar or superior to the
Company's  technology  or design  around  any  patents  that may be owned in the
future by the Company.  Despite the Company's efforts to protect its proprietary
rights,  unauthorized  parties may attempt to copy aspects of its products or to
obtain and use information that it regards as proprietary. Policing unauthorized
use of the Company's  products is difficult,  and while the Company is unable to
determine the extent to which piracy of its software  products exists,  software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United  States.  There can be no  assurance  that the  Company's
means of protecting its  proprietary  rights in the United States or abroad will
be  adequate  or  that  competitors  will  not  independently   develop  similar
technology.  The Company has entered into source code escrow  agreements  with a
limited number of its customers and VARs requiring  release of source code. Such
agreements provide that such parties will have a limited, non-exclusive right to
use such code in the event that there is a bankruptcy  proceeding  by or against
the  Company,  if the Company  ceases to do business or if the Company  fails to
meet its contractual obligations.  The provision of source code may increase the
likelihood of misappropriation by third parties.

         The Company is not aware that it is infringing any  proprietary  rights
of third parties.  There can be no assurance,  however,  that third parties will
not claim  infringement  by the Company  with respect to  QueryObject  System or
enhancements  thereto. The Company expects that software product developers will
increasingly  be subject to  infringement  claims as the number of products  and
competitors in the Company's  industry  segment grows and the  functionality  of
products in different  industry  segments  overlaps.  Any such  claims,  with or
without merit,  could be time consuming to defend,  result in costly litigation,
divert management's  attention and resources,  cause product shipment delays and
require the Company to enter into royalty or licensing agreements.  Such royalty
or licensing agreements,  if required,  may not be available on terms acceptable
to the  Company,  if at all.  In the  event of a  successful  claim  of  product
infringement  against the Company  and  failure or  inability  of the Company to
license the

                                      -10-

<PAGE>
infringed or similar technology,  the Company's business,  operating results and
financial condition could be materially adversely affected.

Competition

         The market in which the  Company  competes  is  intensely  competitive,
highly fragmented and characterized by rapidly changing technology and a lack of
standards.  The Company's current and prospective competitors offer a variety of
data mining and multidimensional data mart software solutions and generally fall
within five categories:  (i) vendors of  multidimensional  database and analysis
software such as Oracle  (Express),  Arbor  (Essbase) and Pilot Software  (Pilot
Lightship  Server);  (ii) vendors of  OLAP/relational  database software such as
Informix (Metacube), Information Advantage (Decision Suite) and Holistic Systems
(Holos);  (iii) vendors of desktop based data mining software,  such as Business
Objects  (BusinessMiner),  Cognos  (Scenario),  Agnoss  (Knowledge  Seeker)  and
DataMind (DataCruncher); (iv) vendors of server based multiprocessor data mining
software  such  as  Thinking   Machines   (Darwin),   Neovista   (Neovista)  and
Hyperparallel (Hyperparallel); and (v) vendors of vertical software applications
for budgeting and financial consolidation, such as Hyperion Software Corporation
(Hyperion and FYPlan) and consulting  vendors such as Coopers & Lybrand,  Arthur
Andersen  and  Deloitte  & Touche,  who focus on  customer  applications  in the
telecommunications, banking, insurance and retail industries.

         The Company  has  experienced  and  expects to  continue to  experience
increased competition from current and potential competitors,  many of whom have
significantly greater financial,  technical,  marketing and other resources than
the  Company.  Such  competitors  may be able to respond  more quickly to new or
emerging  technologies  and changes in customer  requirements  or devote greater
resources to the  development,  promotion  and sales of their  products than the
Company.  Also, certain current and potential  competitors may have greater name
recognition  or more extensive  customer bases that could be leveraged,  thereby
gaining market share to the Company's detriment.  The Company expects additional
competition  as other  established  and emerging  companies  enter into the OLAP
software  market and new products and  technologies  are  introduced.  Increased
competition  could result in price  reductions,  fewer customer orders,  reduced
gross margins and loss of market share, any of which would materially  adversely
affect the Company's business, operating results and financial condition.

         Current and potential  competitors  may make strategic  acquisitions or
establish  cooperative  relationships  among  themselves or with third  parties,
thereby  increasing  the  ability of their  products to address the needs of the
Company's  prospective  customers.  The  Company's  current  or future  indirect
channel  partners  may  establish  cooperative  relationships  with  current  or
potential competitors of the Company,  thereby limiting the Company's ability to
sell its products through particular distribution channels.  Accordingly,  it is
possible that new competitors or alliances among current and new competitors may
emerge and  rapidly  gain  significant  market  share.  Such  competition  could
materially  adversely  affect the Company's  ability to obtain new contracts and
maintenance  and support  renewals for existing  contracts on terms favorable to
the Company.  Further,  competitive  pressures may require the Company to reduce
the price of

                                      -11-

<PAGE>
QueryObject  System,  which  would  materially  adversely  affect the  Company's
business,  operating results and financial condition.  There can be no assurance
that the Company will be able to compete successfully against current and future
competitors,  and the failure to do so would have a material adverse effect upon
its business, operating results and financial condition.

         The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities,  product performance, ease of use
and customer support.  The Company believes it presently competes favorably with
respect  to each of  these  factors.  However,  the  Company's  market  is still
evolving and there can be no assurance  that the Company will be able to compete
successfully  against  current and future  competitors  and the failure to do so
successfully  will  have a  material  adverse  affect  upon  the  its  business,
operating results and financial condition.

Employees

         As of  December  31,  1997,  the  Company  had a total of 55 full  time
employees,  including 16 in research and development,  27 in sales and marketing
and related  customer  support  services and 12 in  administration.  None of the
Company's employees is represented by a collective bargaining agreement, nor has
the Company  experienced any work stoppage.  The Company considers its relations
with its employees to be good.

         The Company's future operating  results depend in significant part upon
the continued service of its key technical and senior management personnel.  The
Company's  future success also depends on its continuing  ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will retain
its key  managerial  or technical  personnel  or attract  such  personnel in the
future.  The  Company  has at times  experienced  and  continues  to  experience
difficulty in recruiting  qualified personnel and there can be no assurance that
the Company will not experience such  difficulties  in the future.  The Company,
either directly or through personnel search firms,  actively recruits  qualified
research  and  development,  financial  and sales  personnel.  If the Company is
unable to hire and retain  qualified  personnel  in the future,  such  inability
could have a material  adverse  effect on its  business,  operating  results and
financial condition.

Recent Developments

         On March 10, 1998, the Company announced that Mark Chroscielewski would
resign as Chairman of the Board of the  Company.  Subsequent  to such date,  the
Company and Mr.  Chroscielewski  entered into  negotiations  as to the terms and
conditions under which such  resignation  would occur, but they have been unable
to reach a definitive  agreement as to such terms and  conditions.  On March 30,
1998,  counsel  to Mr.  Chroscielewski  ("Chroscielewski's  Counsel")  furnished
counsel  to the  Company  with a copy  of a  complaint,  which  Chroscielewski's
Counsel  stated  had been  filed  in New  York  Supreme  Court,  Nassau  County.
Chroscielewski's Counsel further stated that such complaint would be served upon
the  Company if  negotiations  with Mr.  Chroscielewski  were not to result in a
definitive agreement. The complaint alleges a

                                      -12-

<PAGE>
breach of Mr.  Chroscielewski's  employment agreement and a purported term sheet
relating  to his  resignation.  It seeks  damages  in an  amount  not less  than
$301,896, attorneys' fees, certain injunctive relief relating to the description
of the  circumstances of Mr.  Chroscielewski's  departure from the Company to be
included in the Company's  Annual  Report on Form 10-K, a  declaratory  judgment
relating to the parties' rights under the  aforementioned  employment  agreement
and term sheet, costs and disbursements.

         On March 16,  1998,  as part of a  consolidated  branding  effort,  the
Company  announced its intent to do business under the name QueryObject  Systems
Corporation.  The Company intends to submit for stockholder approval at the 1998
Annual Meeting of Stockholders a proposal to change the name of the Company from
CrossZ Software Corporation to QueryObject Systems Corporation.

         The  Company  developed  Voyager to be sold as a  stand-alone  product.
Based on the results of a market test, however,  the Company determined that the
proper  marketing of Voyager was as an integrated  component of the  QueryObject
System.  As a result,  Voyager is being  marketed  as a part of the  QueryObject
System product line.

Risk Factors That May Affect Future Results

         The Company operates in a rapidly changing  environment that involves a
number of risks, some of which are beyond the Company's  control.  The following
discussion highlights the most material of the risks.

         Accumulated Deficit;  Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent  Accountants' Report. At December
31, 1997, the Company had an accumulated deficit of $25,866,986.  For the fiscal
years ended  December  31, 1997 and 1996,  the  Company  incurred  net losses of
$10,563,484 and $4,917,935,  respectively. In addition, the Company has incurred
a net loss in each year during which it has operated, and its operations to date
have been  financed in  significant  part through  sales of both equity and debt
securities.  The Company's expense levels are high and revenues are difficult to
predict.  As a result,  the Company  expects to continue to incur net losses for
the foreseeable future.  There can be no assurance that significant  revenues or
profitability  will ever be achieved or, if they are achieved,  that they can be
sustained or  increased  on a quarterly  or annual  basis in the future.  Future
operating  results  will depend on many  factors,  including  the demand for the
Company's  products,  the level of product and price competition,  the Company's
success in expanding its direct sales force and indirect distribution  channels,
the ability of the Company to develop and market  products and to control costs,
the percentage of the Company's  revenues derived from indirect channel partners
and general economic  conditions.  The independent  accountants'  report for the
year ended  December 31, 1997 states that the  Company's  recurring  losses from
operations and the Company's negative cash flow from operating  activities raise
substantial doubt about the Company's ability to continue as a going concern.


                                      -13-

<PAGE>
         Dependence   Upon   New   Products;    Uncertain   Market   Acceptance.
Substantially  all of the  Company's  revenues  for the  foreseeable  future are
expected to be derived from sales of QueryObject System. Between January 1, 1995
and December 31, 1997, the Company  realized  software product revenue from only
seven  QueryObject  System  installations,  one of which  (sold  in 1995)  was a
pre-production  beta  version.  Further,  the Company has recently  commenced an
integrated  marketing  effort for its products.  The Company's  future financial
performance will depend upon the successful introduction and customer acceptance
of QueryObject  System and the  development of new and enhanced  versions of the
product.  The failure to achieve broad market  acceptance of QueryObject  System
will have a material  adverse  effect on the  business,  operating  results  and
financial condition of the Company.

         Lack of Substantial Revenue; Limited Operating History. The Company has
had a limited  operating  history as a software product company and has not made
significant  sales of its products.  Total  revenues for the year ended December
31, 1997 were  $1,012,159  and consisted  primarily of four sales of QueryObject
System.  Prior to 1997,  the  Company's  revenues  were derived  primarily  from
contract  services  provided to customers using the Company's  proprietary  data
analysis  technology.  The Company has discontinued  this business.  The Company
believes that comparisons of its future operating  results to operating  results
presented herein will not be meaningful.

         Limited Working Capital;  Need For Additional  Funding. At December 31,
1997,  the  Company  had working  capital of  $3,793,889.  The Company has had a
limited  operating  history  as a  software  product  company  and has not  made
significant sales of its products. Therefore, revenues are difficult to predict.
Based on its current  operating plan, the Company believes that its current cash
and cash  equivalent  position is  sufficient  to meet its  working  capital and
capital  expenditure  requirements for the next eight months.  It is more likely
than not that cash generated from operations will be insufficient to satisfy the
Company's  liquidity  requirements  beyond eight  months,  and as a result,  the
Company will seek to sell  additional  equity or convertible  debt securities or
obtain additional credit facilities. However, there can be no assurance that the
Company will be able to consummate any such transactions. The sale of additional
equity or convertible debt securities could result in additional dilution to the
Company's stockholders.

         Potentially Limited Trading Market; Possible Volatility of Stock Price.
The  Common  Stock is listed on the Nasdaq  SmallCap  Market  ("Nasdaq").  Under
recently  implemented  Nasdaq rules, in order for the Company to remain eligible
for listing on Nasdaq,  (i) the  Company's  Common Stock must have a minimum bid
price of $1.00,  (ii) the  Company  must have  minimum  tangible  net  assets of
$2,000,000 or a market  capitalization  of $35,000,000 or net income of $500,000
in two of the three prior  years,  (iii) the Company must have a public float of
at least  500,000  shares  with a market  value of at least  $1,000,000  and the
Common  Stock must have at least two  market  makers and be held of record by at
least 300 stockholders. While the Company currently satisfies Nasdaq listing and
maintenance  standards,  the Company believes that without additional  financing
(of  which  there  can be no  assurance),  the  Company  could  have  less  than
$2,000,000 in net tangible assets by September 30, 1998. The failure to meet the
maintenance  criteria  in the future  may  result in the Common  Stock no longer
being eligible for quotation on

                                      -14-

<PAGE>
Nasdaq and trading, if any, of the Common Stock would thereafter be conducted in
the non- Nasdaq  over-the-counter  market.  As a result of such delisting of the
Common Stock from Nasdaq,  it may be more difficult for investors to dispose of,
or to obtain accurate quotations as to the market value of, the Common Stock.

         The   regulations   of   the   Securities   and   Exchange   Commission
("Commission") promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), require additional disclosure relating to the market for penny
stocks.  Commission  regulations  generally define a penny stock to be an equity
security  that has a market  price of less than  $5.00  per  share,  subject  to
certain exceptions.  A disclosure schedule explaining the penny stock market and
the risks  associated  therewith is required to be delivered to a purchaser  and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons  other than  established  customers and  accredited  investors
(generally  institutions).  In  addition,  the  broker-dealer  must  provide the
customer  with  current  bid and  offer  quotations  for the  penny  stock,  the
compensation  of the  broker-dealer  and its  salesperson in the transaction and
monthly account  statements showing the market value of each penny stock held in
the  customer's  account.  If the  Company's  securities  become  subject to the
regulations  applicable to penny stocks (i.e., by Nasdaq delisting),  the market
liquidity for the Company's  securities could be severely  affected.  In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the  Company's  securities  and thus the  ability of  purchasers  of the
Company's  securities to sell their securities in the secondary  market.  In the
absence of an active trading market,  holders of the Common Stock may experience
substantial difficulty in selling their securities.

         The  trading  price of the  Company's  Common  Stock is  expected to be
subject to  significant  fluctuations  in response to  variations  in  quarterly
operating results,  changes in analysts' earnings estimates,  general conditions
in the computer  software  industry and other  factors.  In addition,  the stock
market is subject to price and volume fluctuations that affect the market prices
for companies and that are often unrelated to operating performance.

         Dependence on and Expansion of Indirect Channel  Partners.  An integral
part of the  Company's  sales and  marketing  efforts  is to  develop  strategic
relationships  with  indirect  channel  partners  such as OEMs  and  VARs and to
increase the proportion of the Company's  customers  licensed  through  indirect
channel  partners.  Accordingly,  the Company believes that the licensing of its
products through indirect channel partners will in the future account for a high
percentage  of its  revenues.  There can be no assurance  that any customer will
continue to purchase the Company's products in the future. The Company currently
is  investing,  and  intends to  continue to invest,  significant  resources  to
develop  indirect channel  partners,  which could adversely affect its operating
results  if its  efforts  do  not  generate  significant  license  revenues.  In
addition,  there can be no  assurance  that the Company  will be able to attract
OEMs or VARs or other indirect  channel partners that will be able to market the
Company's products  effectively and will be qualified to provide timely and cost
effective  customer  support  and  service  which  could  adversely  affect  the
Company's  results of operations.  In addition,  if the Company is successful in
selling products  through these sales channels,  the Company's gross margins may
be negatively affected

                                      -15-

<PAGE>
due to the lower unit prices that the Company  expects to receive  when  selling
through OEMs or VARs or other indirect channel partners.

         Need to Develop New Products and Adapt to Rapid  Technological  Change.
The market for the Company's  software is characterized  by rapid  technological
change, frequent new product introductions and evolving industry standards.  The
introduction  of products  embodying new  technologies  and the emergence of new
industry  standards can render existing products obsolete and unmarketable.  The
life cycles of the Company's  products are difficult to estimate.  The Company's
future success will depend upon its ability to enhance its current  products and
to  develop  and  introduce  new  products  that keep  pace  with  technological
developments  and  emerging  industry  standards  and address  the  increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful  in developing  and  marketing  product  enhancements  or new
products that respond to technological  change or evolving  industry  standards,
that the Company will not  experience  difficulties  that could delay or prevent
the successful development, introduction and marketing of these products or that
the Company's new products and product  enhancements  will  adequately  meet the
requirements of the marketplace and achieve market acceptance. Any potential new
products would likely be subject to significant  technical risks. If the Company
experiences  delays in the commencement of commercial  shipments of new products
and  enhancements,  the Company  could  experience  delays in or loss of product
revenues.  If the Company is unable,  for  technological  or other  reasons,  to
develop and introduce  new products or  enhancements  of existing  products in a
timely   manner  in  response  to  changing   market   conditions   or  customer
requirements,  the Company's business, operating results and financial condition
will be materially adversely affected.

         Dependence on Significant Customers. For the fiscal year ended December
31, 1997, VGER Technologies,  Inc. accounted for 65% of the Company's  revenues.
The  Company  does not  anticipate  receiving  significant  revenues  from  this
customer in 1998.

         Competition.  The  market  for  the  Company's  products  is  intensely
competitive and subject to rapid change. The Company's competitors include Arbor
Software,  HNC Software Inc., Red Brick Systems,  Inc.,  Informix Corp.,  Oracle
Corp.,  IBM, and Cognos Inc.  Because there are relatively low barriers to entry
into the software market, the Company expects additional  competition from other
established and emerging  companies if the business  intelligence  data delivery
software market continues to develop and expand. The Company's  competitors have
longer  operating  histories,  significantly  greater  financial,  technical and
marketing  resources  and  name  recognition  and a  larger  installed  base  of
customers and products.  In addition,  many of the  Company's  competitors  have
well-established  relationships  with  current and  potential  customers  of the
Company, have extensive knowledge of the relational database industry and may be
able to offer a single vendor solution.  As a result, the Company's  competitors
may be able to respond more quickly to new or emerging  technologies and changes
in customer  requirements,  or to devote greater  resources to the  development,
promotion and sale of their products. Further, current and potential competitors
have established or may establish cooperative  relationships among themselves or
with third parties to increase the ability of their products to address customer
needs.  Accordingly,  it is possible  that new  competitors  or alliances  among
competitors

                                      -16-

<PAGE>
may emerge and rapidly  acquire  significant  market  share.  The  Company  also
expects  that  software  industry  consolidations  may  create  more  formidable
competitors,  resulting in price  reductions,  reduced gross margins and loss of
market  share,  any of which could  materially  adversely  affect the  Company's
business,  operating results and financial condition.  There can be no assurance
that the Company will be able to compete successfully against current and future
competitors  or  that  competitive  pressures  faced  by the  Company  will  not
materially  adversely  affect its  business,  operating  results  and  financial
condition.

         Dependence  Upon Key  Personnel;  Need to  Increase  Sales,  Marketing,
Development and Technical Personnel. The Company's future performance depends in
significant  part upon the  continued  service of its key  technical,  sales and
senior  management  personnel.  The loss of the  services  of one or more of the
Company's key employees,  in particular,  Alan Kaufman,  the President and Chief
Executive  Officer,  could  have a  material  adverse  effect  on the  Company's
business,  operating  results  and  financial  condition.  The  Company  has  an
employment  and  consultant  agreement with Mr. Kaufman which expires in October
1998,  which provides that Mr. Kaufman will serve as either  President and Chief
Executive  Officer or as a consultant.  The Company has  purchased  "key person"
life  insurance  policies  on Mr.  Kaufman's  life in the amount of one  million
dollars.  The Company's future success also depends on its continuing ability to
attract,  train  and  retain  highly  qualified  technical,   sales,  marketing,
development and managerial personnel. Competition for such personnel is intense,
and there can be no  assurance  that the Company  can retain its key  technical,
sales,  development and managerial employees or that it can attract,  assimilate
or retain other highly qualified  technical,  sales,  development and managerial
personnel  in the future.  If the Company is unable to hire such  personnel on a
timely  basis in the future,  its  business,  operating  results  and  financial
condition could be materially adversely affected.

         Lack of Patent  Protection  and  Proprietary  Protection on Proprietary
Technology; Risks of Infringement. The Company relies primarily on a combination
of trade  secrets,  confidentiality  agreements  and  contractual  provisions to
protect its proprietary technology.

         The Company has not been  notified  that its  products  infringe on the
proprietary rights of third parties.  There can be no assurance,  however,  that
third parties will not claim infringement by the Company with respect to current
or future products. See "Description of Business-- Research and Development."

         Potential  Fluctuations in Periodic Results. The Company's revenues may
be  subject  to  significant   variation  from  period  to  period  due  to  the
discretionary  nature of business  intelligence data delivery software purchases
and will be difficult to predict.  Further,  although the Company's product line
will  include  products  with sales  prices  from $7,500 to over  $250,000,  the
majority of its  revenues is expected  to be derived  from  products  with sales
prices  from  $60,000 to  $160,000.  As a result,  the timing of the receipt and
shipment  of a single  order  can have a  significant  impact  on the  Company's
revenues and results of operations for a particular  period. It is also expected
that for the foreseeable  future a relatively small number of customers and VARs
will account for a significant percentage of the Company's revenues. The Company

                                      -17-

<PAGE>
anticipates that product revenues in any quarter will be substantially dependent
on orders  booked  and  shipped in that  quarter,  and  revenues  for any future
quarter  will not be  predictable  with any  significant  degree  of  certainty.
Product  revenues are also difficult to forecast because the market for business
intelligence  software  products is rapidly  evolving,  and the Company's  sales
cycle may vary substantially  with each customer.  As the Company matures in its
product  releases,  it is anticipated that the Company will operate with limited
order backlog  because its software  products will typically be shipped  shortly
after orders are received.

         Risk of  Product  Defects;  Product  Liability.  Software  products  as
complex  as those  offered  by the  Company  may  contain  undetected  errors or
failures when first  introduced or when new versions are released.  Although the
Company has not experienced  material adverse effects  resulting from any errors
to date,  there can be no assurance that,  despite testing by the Company and by
current and potential customers, errors will not be found in new versions of the
Company's products after commencement of commercial shipments, resulting in loss
of or delay in market  acceptance,  which could have a material  adverse  effect
upon the Company's business, operating results and financial condition. Although
the Company does not maintain an "errors and omissions"  insurance  policy,  its
license agreements with its customers  typically contain provisions  designed to
limit the Company's  exposure to potential product  liability claims.  While the
Company has not experienced  product  liability  claims to date, the license and
support  of  products  by the  Company  may entail  the risk of such  claims.  A
successful  product  liability  claim  brought  against the Company could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

         Limitation on Net Operating Loss  Carryforward.  The Company  estimates
that at December 31, 1997 for United States federal income tax purposes,  it had
tax benefits  attributable  to net operating loss and research and  experimental
tax credit  ("NOL")  carryforwards  of  $22,000,000  and $144,000  respectively,
available  to  offset  future   federal   taxable  income  and  tax.  These  NOL
carryforwards  expire at various dates through 2012. The availability of the NOL
to  reduce  or offset  taxable  income of the  Company  is  subject  to  various
limitations  under Section 382 of the Internal  Revenue Code of 1986, as amended
(the  "Code").  In  particular,   the  Company's  ability  to  utilize  the  NOL
carryforward  would be restricted  upon the occurrence of an "ownership  change"
within the meaning of Section 382 of the Code.  Although  the  determination  of
whether an  ownership  change  has  occurred  is  subject  to factual  and legal
uncertainties,  the Company  believes that an ownership change occurred upon the
completion of previous  financings and such  "ownership  change" will materially
limit the Company's ability to utilize its NOL carryforward.  As a result of the
"ownership  change,"  the Company  will  generally  be  permitted to utilize NOL
carryforward  (available  on the date of such change) in any year  thereafter to
reduce its income to the extent  that the amount of such  income does not exceed
the product of (i) the fair market value of the Company's  outstanding equity at
the time of the  ownership  change  (reduced  by the amount of  certain  capital
contributions  such as those received  pursuant to the Company's  initial public
offering) and (ii) a long-term tax-exempt rate published by the Internal Revenue
Service (5.64% for ownership changes occurring in August 1997). Moreover,  while
such loss  carryforwards  are available to offset future  taxable  income of the
Company, the Company does

                                      -18-

<PAGE>
not expect to  generate  sufficient  taxable  income so as to  utilize  all or a
substantial portion of such loss carryforwards prior to their expiration.

         Management of Changing Business. If the material growth in revenue that
the Company  anticipates does in fact occur, it will place a significant  strain
upon the Company's  management  systems and resources.  The Company continues to
implement  new  financial  and  management   controls,   reporting  systems  and
procedures.   The  Company's  ability  to  compete  effectively  and  to  manage
anticipated  future growth will require  continued  improvement in the Company's
financial and management  controls,  reporting systems and procedures as well as
the  implementation of new systems as necessary.  There can be no assurance that
the Company will be able to do so successfully.  The Company's  failure to do so
could have a material  adverse  effect upon the  Company's  business,  operating
results and financial condition.

         International Operations.  The Company had no international sales prior
to 1996.  During 1996,  license revenue was recorded with AT&T Istel, a division
of AT&T, which is based in the United Kingdom. The Company intends to expand its
international  operations and to enter additional  international  markets, which
will require significant  management attention and financial resources and could
adversely  affect  the  Company's  business,   operating  results  or  financial
condition.  In order to expand  international  sales successfully in 1998 and in
subsequent  periods,  the Company must establish  additional foreign operations,
hire additional  personnel and recruit  additional  international  resellers and
distributors.  To the  extent  that the  Company  is unable to do so in a timely
manner,  the Company's growth,  if any, in international  sales will be limited,
and the Company's  business,  operating results and financial condition could be
materially   adversely   affected.   It  is   anticipated   that  the  Company's
international sales, if any, will be denominated in U.S. dollars. An increase in
the value of the U.S.  dollar  relative  to  foreign  currencies  could make the
Company's products more expensive and,  therefore,  potentially less competitive
in  those  markets.   Additional   risks   inherent  in  the  Company's   future
international  business  activities  generally  include  unexpected  changes  in
regulatory  requirements,  tariffs and other trade barriers, costs of localizing
products for foreign  countries,  lack of  acceptance  of localized  products in
foreign countries,  longer accounts  receivable payment cycles,  difficulties in
managing   international   operations,   potentially  adverse  tax  consequences
including  restrictions  on the  repatriation of earnings,  weaker  intellectual
property  protection and the burdens of complying with a wide variety of foreign
laws.  There can be no  assurance  that such  factors  will not have a  material
adverse effect on the Company's future  international  sales and,  consequently,
the Company's results of operations.


                                      -19-

<PAGE>
ITEM 2.  DESCRIPTION OF PROPERTY

         The Company leases 16,385 square feet of office space in Uniondale, New
York  as  its  principal  administrative,  sales,  marketing  and  research  and
development  facility.  The lease relating to such facility  expires in 2004. In
addition,  the Company  also leases sales  offices on a short-term  basis in the
metropolitan  areas of Chicago,  Miami, San Francisco and London,  England.  The
Company believes that its existing facilities are adequate for its current needs
but anticipates  that it will need to seek additional  space in the future.  The
Company believes that suitable additional or alternative space will be available
in the future on commercially reasonable terms as needed.

ITEM 3.  LEGAL PROCEEDINGS

         Not Applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On October  21,  1997,  the Board of  Directors  of Cross/Z  California
adopted  resolutions  authorizing an amendment  ("Amendment") to the Amended and
Restated   Articles  of  Incorporation  of  Cross/Z   California,   effecting  a
one-for-two   reverse  stock  split  (the   "Reverse   Split")  of  all  Cross/Z
California's  outstanding  shares of  Common  Stock,  par value  $.001 per share
("Common  Stock"),  Series A Preferred Stock, par value $.001 per share ("Series
A"), Series B Preferred  Stock, par value $.001 per share ("Series B"), Series C
Preferred  Stock,  par value $.001 per share ("Series C") and Series D Preferred
Stock,  par value $.001 per share  ("Series D" and  together  with the Series A,
Series B and Series C, the "Outstanding  Preferred Stock").  On or about October
22, 1997,  holders of (i) a majority of the  outstanding  shares of Common Stock
voting as a class,  and (ii) a majority of the  outstanding  shares of Series A,
Series B and Series C voting  together as a single class and (iii) a majority of
the  outstanding  shares of Series D delivered to the Company a written  consent
(the  "Consent")  to (a) the  Amendment,  (b) the  conversion  of all  shares of
Outstanding Preferred Stock into Common Stock (the "Preferred Stock Conversion")
immediately  prior to the closing of an initial  public  offering  resulting  in
gross proceeds of at least  $7,500,000 at an initial  offering price of at least
$5.00 per share  (such  amount  being  determined  giving  effect to the Reverse
Split) and (c) an increase to 1,950,000 shares in the number of shares of Common
Stock available for issuance (the "Plan Amendment")  under Cross  Z/California's
1991  Incentive  Stock Plan (such  amount  having been  determined  after giving
effect to the Reverse  Split).  The  Consent  was  approved in lieu of holding a
meeting  of the  shareholders  to  adopt  the  Amendment,  the  Preferred  Stock
Conversion  and the Plan  Amendment,  in accordance  with Section  603(a) of the
California General Corporation Law.

                                      -20-

<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         The  Company's  Common  Stock is traded on the Nasdaq  SmallCap  Market
under the symbol  CRSZ.  The table  below  sets forth the range of closing  sale
prices of the Common  Stock on such  market as reported by Nasdaq for the fiscal
periods specified.

                                                          Common Stock
                                                    High                   Low
                                                    ----                   ---
Fiscal 1997

Fourth Quarter* ...........................         $6.00                 $4.75

--------------
         *        The Company's Common Stock began trading on Nasdaq on November
                  20, 1997;  prior  thereto,  there was no public market for the
                  Common Stock.

         As of March 1, 1998,  there were 135  record  holders of the  Company's
Common Stock.  The Company  believes that there are in excess of 500  beneficial
owners of its Common Stock.

         The Company has never paid any  dividends  on its Common Stock and does
not  intend  to pay  such  dividends  in the  foreseeable  future.  The  Company
currently  intends to retain any future  earnings for the development and growth
of the Company.

         On November 19, 1997 the  Commission  declared  effective the Company's
Registration Statement on Form SB-2 (File No. 333-34667) relating to the initial
public  offering  ("IPO") of 2,500,000  shares of common stock,  $.001 par value
(the  "Common  Stock")  of the  Company  at a price per share of $6.00.  The IPO
closed on November 25, 1997 and was underwritten by GKN Securities Corp. ("GKN")
and Barington Capital Group, L.P. (together with GKN, the  "Underwriters").  The
Underwriters received underwriting  discounts and commissions of 8% of the gross
offering   proceeds  (or   $1,200,000).   In  addition,   the  Company  incurred
approximately   $1,331,000   of   expenses   from  the   offering   including  a
non-accountable  expense  allowance paid to the  Underwriters of 3% of the gross
offering proceeds (or $450,000).  Accordingly, the Company received net proceeds
of  approximately  $12,469,000  from the IPO.  Of such  proceeds,  approximately
$4,461,000 was used to repay bridge notes ("Bridge  Notes") issued in connection
with a bridge financing (the "Bridge  Financing")  consummated in July 1997. The
Bridge  Notes  consisted  of 43  unsecured  promissory  notes  in the  aggregate
principal  amount of  $4,300,000  bearing  interest at the rate of 10% per annum
through September 30, 1997 and at a rate of 13% per annum thereafter and payable
with interest thereon upon the consummation of the IPO.  Approximately  $262,000
of the  principal  and interest  repaid on the Bridge Notes was repaid on Bridge
Notes held by 5%  stockholders  and entities  affiliated  with  directors of the
Company. The

                                      -21-

<PAGE>
Company also used  approximately  $210,000 of the net proceeds from the offering
to  repay  promissory  notes  ("Second  Interim   Financing  Notes")  issued  in
connection with a interim  financing  consummated in June 1997 ("Second  Interim
Financing") and  approximately  $610,000 of the net proceeds to repay promissory
notes  ("October 1997 Interim  Financing  Notes")  issued in connection  with an
interim   financing   consummated   in  October  1997   ("October  1997  Interim
Financing").   The  October  1997  Interim  Financing  Notes  were  held  by  5%
stockholders  of  the  Company.   Of  the  remaining   proceeds  from  the  IPO,
approximately  $1,004,000  has been used to fund the Company's  integrated  full
scale  sales and  marketing  activities  and to expand  its sales and  marketing
activities both  domestically  and  internationally,  $594,000 has been used for
research  and  development  including  enhancements  to  existing  features  and
development of new functions for QueryObject System and $300,000 of the proceeds
of the IPO have been used for working  capital and general  corporate  purposes.
The remaining amount of the proceeds, $5,290,000, have been invested temporarily
in investment grade, short-term, interest bearing instruments.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
         PLAN OF OPERATION

         The discussion in this report on Form 10-KSB  contains  forward-looking
statements that involve risks and  uncertainties.  The Company's  actual results
could  differ  materially  from the  results  discussed  in the  forward-looking
statements.  Factors that could cause or contribute to such differences include,
but are not limited to, those  discussed  in the section  above  entitled  "Risk
Factors  That May Affect  Future  Results,"  in Item 1 of this report as well as
those risks discussed in this section and elsewhere on this report.

         The discussion  and analysis  below should be read in conjunction  with
the Financial  Statements  of the Company and the Notes to Financial  Statements
included elsewhere herein.

Overview

         The  Company  commenced  operations  in  February  1989,  and  to  date
substantially  all of its revenues  have been derived  from  providing  contract
services to customers using its proprietary business intelligence technology. In
the third quarter of 1996, the Company shifted its focus to commercializing  its
proprietary  business  intelligence  technology and most of its activities since
then have been  devoted  to  research  and  development,  recruiting  personnel,
raising   capital,   and   developing  a  sales  and   marketing   strategy  and
infrastructure.  Accordingly,  the Company has a limited  operating history as a
software  product company and has only limited sales of its QueryObject  System.
The Company  believes that  comparisons of its future  operating  results to the
operating results presented herein, will not be meaningful. The Company's future
financial  performance will depend upon the successful  formal  introduction and
customer acceptance of QueryObject System.

         To date, the Company has incurred  substantial  losses from operations,
and at  December  31,  1997  had an  accumulated  deficit  of  $25,866,986.  The
Company's operations and activities

                                      -22-

<PAGE>
have  been  primarily  funded  through  sales of  equity  and  debt  securities,
including  the closing of the IPO on November 25, 1997.  The Company  expects to
incur  substantial  operating  expenses  in the  future to support  its  product
development  efforts,  establish and expand its domestic and international sales
and marketing  capabilities,  including  recruiting  additional indirect channel
partners,  and support and expand its  technical  and  management  personnel and
organization.

         In  November  1997,  the Company  began  implementation  of  full-scale
marketing  activity  for  QueryObject  System.   QueryObject  System  previously
required   additional   consulting   services  to  implement  and  was  promoted
selectively  through the direct sales channel,  at several industry trade shows,
and to potential  business  partners.  The current release of QueryObject System
has reduced consulting requirements and is capable of running on additional UNIX
operating  systems and the Windows NT  operating  system.  In 1998,  the Company
intends to increase  promotional  activity,  including  increased trade show and
partnering activity and public relations. The Company intends to market and sell
QueryObject  System  through its direct sales force as well as through  indirect
channel  partners  such as OEMs and VARs.  The  Company  anticipates  that sales
through  indirect  channel  partners  will be harder to  forecast  and will most
likely have lower gross margins. There can be no assurance that the Company will
be successful in developing  additional  products,  in marketing and selling its
products,  or that such  products  will  achieve  broad market  acceptance.  The
Company's  inability  to develop  its  products or to  establish  and expand its
relationships  with  indirect  channel  partners  would have a material  adverse
effect on the Company's business, financial condition and results of operations.

         Revenues  from  the  sales  of the  Company's  products  are  generally
recognized upon the execution of a software licensing  agreement and shipment of
the product,  provided that no  significant  vendor  obligations  remain and the
resulting  receivable is deemed collectible by management.  In instances where a
significant vendor obligation exists,  revenue recognition is delayed until such
obligation  has been  satisfied.  Allowances  for estimated  future  returns are
provided  for  upon  shipment.  It is  anticipated  that in the near  term,  the
Company's  revenues  from its sales of products will be difficult to predict due
to the discretionary nature of business data delivery software purchases and the
variable  length of the sales cycle with  respect to new product  introductions.
Further,  although the Company's  product line will include  products with sales
prices  from  $7,500 to over  $250,000,  the  preponderance  of its  revenues is
expected to be derived from products with sales prices from $60,000 to $160,000.
As a result, the timing of the receipt and shipment of a single order can have a
significant  impact on the Company's  revenues,  results of operations  and cash
flows for a particular period.

Results of Operations

                  The following  table sets forth certain items in the Company's
statements  of operations  for the years ended  December 31, 1997 and 1996 ($ in
thousands):

                                      -23-

<PAGE>

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              1997              1996
                                                              ----              ----

Revenues
<S>                                                        <C>                <C>
      Software licenses .................................  $    596           $    851
      Services and maintenance(1) .......................       416              1,052
                                                           --------           --------
         Total revenues .................................     1,012              1,903
                                                           --------           --------

Cost of revenues
      Software licenses .................................        75                102
      Services and maintenance ..........................       131                376
                                                           --------           --------
         Total cost of revenues .........................       206                478
                                                           --------           --------

Gross profit ............................................       806              1,425
                                                           --------           --------

Operating expenses
      Sales and marketing ...............................     4,576              3,145
      Research and development ..........................     2,523              1,792
      General and administrative ........................     1,914              1,140
                                                           --------           --------
         Total operating expenses .......................     9,013              6,077
                                                           --------           --------

Loss from operations ....................................    (8,207)            (4,652)
  Interest income .......................................        78                 88
  Interest expense ......................................      (806)              (355)
  Other income ..........................................         1                  1
                                                           --------           --------
Loss before extraordinary item ..........................    (8,934)            (4,918)

  Extraordinary loss from extinguishment of
    debt.................................................    (1,629)              --
                                                           --------           --------
Net Loss ................................................  $(10,563)          $ (4,918)
                                                           ========           ========
</TABLE>

(1) Prior to the year ended December 31, 1997 services and maintenance  revenues
consisted entirely of service revenue.

      Revenues

      The  Company's   license  revenues  have  been  generated  from  sales  of
QueryObject  System.  Service  revenues  have been  generated  from fees paid by
customers on a project or contract  basis for data analysis by the Company using
its  proprietary  software,  and are recognized  over the term of the respective
agreements. Maintenance revenues consist of ongoing support and product

                                      -24-

<PAGE>
updates  and are  recognized  ratably  over the term of the  contract,  which is
typically twelve months (See Note 1 of Notes to the Financial  Statements).  The
Company has recognized  revenue,  for all periods presented,  in accordance with
the American  Institute of Certified  Public  Accountants  Statement of Position
91-1  entitled  "Software  Revenue  Recognition."  The  Company  will  implement
Statement of Position 97-2 on software revenue  recognition in the first quarter
of 1998. The Company  believes that the addition of this statement will not have
a significant impact on the Company.

      Total revenues decreased by $891,000, or 47%, from $1,903,000 for the year
ended  December 31, 1996 ("1996") to $1,012,000  for the year ended December 31,
1997 ("1997").  License revenues decreased by $255,000, or 30%, from $851,000 in
1996 to $596,000 in 1997.  During 1997  license  revenues  were derived from the
sale of four licenses  while during 1996 license  revenues were derived from the
sale of three  licenses.  While more  licenses  were sold in 1997 as compared to
1996,  the average  license sale in 1997  decreased to $149,000 from $284,000 in
1996,  resulting from lower prices charged by the Company for QueryObject System
running on the UNIX operating system as compared to MVS. Service and maintenance
revenue  decreased by $636,000,  or 60%, from  $1,052,000 in 1996 to $416,000 in
1997, primarily due to the curtailment of service-based engagements. The Company
has  discontinued  the  pursuit  of  service-based   engagements  and  does  not
anticipate any ongoing material revenue from these activities.

      Cost of Revenues

      Cost of software license revenues consists primarily of product packaging,
documentation and production costs. Cost of software license revenues  increased
as a percentage of software  license revenues from 12% in 1996 to 12.5% in 1997,
primarily due to higher  documentation  costs.  Cost of services and maintenance
revenues consist primarily of customer support costs and direct costs associated
with providing services.  Cost of services and maintenance revenues decreased as
a percentage  of services and  maintenance  revenues  from 36% in 1996 to 32% in
1997,  primarily due to lower staffing levels  resulting from the curtailment of
service based engagements.

      Operating Expenses

      Sales and Marketing.  Sales and marketing  expenses  consist  primarily of
personnel costs,  including sales  commissions and incentives,  of all personnel
involved  in the sales and  marketing  process,  as well as  related  recruiting
costs,  public relations,  advertising  related costs,  collateral  material and
trade shows. Sales and marketing expenses increased by $1,431,000,  or 45%, from
$3,145,000 in 1996 to $4,576,000 in 1997, primarily due to costs associated with
the  expansion  of the direct sales and  technical  pre-sales  force  (including
related recruiting costs) and, to a lesser extent, increased marketing personnel
costs. The Company believes that its sales and marketing  expenses will increase
in absolute  dollars as the Company  continues to increase  promotion  and other
marketing expenses.


                                      -25-

<PAGE>
      Research  and  Development.  Research  and  development  expenses  consist
primarily of salaries and other  personnel-related  expenses,  recruiting  costs
associated  with  the  hiring  of  additional  software  engineers  and  quality
assurance personnel, consultant costs and depreciation of development equipment.
Research and development expenses increased by $731,000, or 41%, from $1,792,000
in  1996 to  $2,523,000  in  1997,  primarily  due to an  increase  in  software
engineering  and quality  assurance  personnel and related costs and  consultant
costs. The Company  believes that a significant  level of investment for product
research and development is required to remain competitive and, accordingly, the
Company  anticipates  that it will continue to devote  substantial  resources to
product  research and development and that these costs will increase in absolute
dollars.  To date,  all research  and  development  costs have been  expensed as
incurred. See Note 1 of Notes to Financial Statements.

      General and  Administrative.  General and Administrative  expenses consist
primarily  of personnel  costs for finance,  MIS,  human  resources  and general
management,  as  well  as  insurance  and  professional  expenses.  General  and
administrative  expenses increased by $774,000,  or 68%, from $1,140,000 in 1996
to  $1,914,000  in 1997,  primarily  due to increased  non-recurring  consulting
expense  relating  to  Advisory  Board stock  options  and, to a lesser  extent,
increased  personnel  related costs and benefits.  The Company believes that its
general and  administrative  expenses  will  increase in absolute  dollars as it
incurs  additional  costs related to being a public  company,  such as increased
professional  fees,  expenses related to directors' and officers'  insurance and
investor relations programs.

      Interest Income and Interest Expense

      Interest  income  represents  income earned on the Company's cash and cash
equivalents.  Interest income decreased by $10,000, or 12%, from $88,000 in 1996
to $78,000 in 1997,  primarily due to a lower level of cash and cash equivalents
on deposit during 1997.

      Interest expense  generally  represents  charges relating to the Company's
Loan Agreement,  interest  expense on capital  equipment  leases,  and for 1997,
interest  relating to the Bridge and Interim  Financings (see Note 6 of Notes to
the Financial Statements). Interest expense increased by $451,000, or 127%, from
$355,000  in 1996 to  $806,000  in 1997.  This  increase  was  primarily  due to
interest  expense and the  amortization of debt discount and debt issuance costs
relating to the Bridge and Interim  Financings.  These charges totaled $192,000,
$319,000 and $100,000  respectively  for 1997. This increase in interest expense
was  partially  offset by a decrease  in  outstanding  notes  payable  that were
converted  into  Series D  Redeemable  Convertible  Preferred  Stock  ("Series D
Preferred")  or repaid from the proceeds of the Series D Preferred  financing in
1996 (see Note 8 of Notes to the Financial Statements),  and reduced outstanding
borrowings under the Loan Agreement.

      Extraordinary Loss from Early Extinguishment of Debt

      On November 25, 1997,  the Company  repaid the  noteholders  of the Bridge
Financing out of the proceeds of the IPO.  Accordingly,  the Company recorded an
extraordinary loss of $1,629,000

                                      -26-

<PAGE>
relating  to the  early  extinguishment  of  debt.  The  extraordinary  loss was
comprised of unamortized  deferred debt discount and  unamortized  deferred debt
issuance costs related to the Bridge Financing.

      Provision for Income Taxes

      The Company  accounts for income  taxes in  accordance  with  Statement of
Financial  Accounting  Standards  No. 109,  "Accounting  for Income  Taxes." The
Company incurred net operating losses in 1997 and 1996 and consequently  paid no
federal or state  income  taxes.  At  December  31,  1997,  the  Company had net
operating  losses and  research and  experimental  tax credit  carryforwards  of
$22,000,000  and  $144,000,  respectively,  available to offset  future  federal
taxable income and tax. These net operating loss carryforwards expire at various
dates through 2012.  Although the  determination  of whether an ownership change
has occurred is subject to factual and legal uncertainties, the Company believes
that an ownership change occurred upon the completion of previous financings and
such "ownership  change" will materially limit the Company's  ability to utilize
its NOL carryforward.  Moreover,  while such loss carryforwards are available to
offset  future  taxable  income of the  Company,  the Company does not expect to
generate sufficient taxable income so as to utilize all or a substantial portion
of such loss carryforwards prior to their expiration.

Liquidity and Capital Resources

      On November  25,  1997,  the  Company  closed the IPO.  The  Company  sold
2,500,000  shares  of  Common  Stock  in  the  IPO  and  received  approximately
$12,470,000  of cash,  net of  underwriting  discounts,  commissions  and  other
offering costs. See "Item 5 -- Market for Common Equity and Related  Stockholder
Matters." The Company immediately repaid $5,100,000 plus accrued interest due on
the Bridge Notes and interim financings noted below. Upon completion of the IPO,
all  outstanding  shares of Series A,  Series B, Series C and Series D Preferred
Stock (a total of approximately  1,697,000 shares) were converted into shares of
Common Stock.

      Prior to the IPO, the Company had funded its operations  primarily through
sales  of  preferred  equity   securities,   with  net  proceeds   therefrom  of
approximately  $14,000,000 and, to a lesser extent,  through interim  financings
and the Bridge Financing,  through capital and operating  equipment leases,  the
issuance of notes payable and a borrowing  arrangement  ("Loan  Agreement") with
H.C.C.  Financial Services.  As of December 31, 1997, the Company had $5,437,000
in cash  and  cash  equivalents.  Net  cash  used in  operating  activities  was
$7,456,000  and  $5,542,000 in 1997 and 1996,  respectively.  For 1997, net cash
used  in  operating  activities  was  primarily  attributable  to a net  loss of
$10,563,000,  less an extraordinary loss on extinguishment of debt on the Bridge
Financing of $1,629,000, options issued for consulting services and amortization
of debt  discount  and  issuance  costs.  For 1996,  net cash used in  operating
activities  was  primarily  attributable  to a net  loss of  $4,918,000  plus an
increase in accounts payable and accrued expenses of $769,000. Net cash provided
by financing activities was $12,196,000 and $8,310,000 in 1997

                                      -27-

<PAGE>
and 1996, respectively, as a result of the items noted below. In addition to the
IPO, since January 1, 1996, the Company's principal sources of capital have been
as follows:

      Series C Private  Placement.  During the latter part of 1995 through March
1996,  the  Company  consummated  a private  placement  of Series C  Convertible
Preferred  whereby it issued the equivalent of an aggregate of 258,503 shares of
Common  Stock at a per share  offering  price of $8.56 and  issued  warrants  to
purchase an aggregate of 131,851  shares of Common Stock at an exercise price of
$8.56 per share.

      Series D Private Placement. From May 1996 through August 1996, the Company
consummated  a private  placement of Series D Redeemable  Convertible  Preferred
Stock whereby it issued the  equivalent  of an aggregate of 1,365,790  shares of
Common Stock at a per share  offering  price of $8.56 (after taking into account
all accrued and unpaid  dividends)  and issued an aggregate  of 34,053  warrants
with an exercise price of $8.56 per share.

      First Interim Financing.  In May 1997, the Company  consummated an interim
financing  whereby it  received  the  principal  amount of  $500,000  and issued
$500,000 of principal amount unsecured  promissory notes. Such amount was repaid
out of the proceeds of the Bridge Financing in July 1997.

      Second Interim Financing. In June 1997, the Company consummated the Second
Interim  Financing  whereby it received the  principal  amount of  $200,000.  In
connection therewith, the Company also issued warrants to purchase 47,700 shares
of Common  Stock at an  exercise  price of $8.56 per share.  The Second  Interim
Financing was repaid out of the proceeds of the IPO.

      Third Interim Financing.  In June 1997, the Company consummated an interim
financing  whereby it received  the  principal  amount of $250,000  and issued a
$250,000  principal amount unsecured  promissory note ("Third Interim  Financing
Notes").  In connection with the Bridge Financing,  the holders of Third Interim
Financing Notes agreed to convert such Third Interim  Financing Notes into 2 1/2
Bridge  Units.  The Company  also issued  warrants to purchase  6,309  shares of
Common Stock at an exercise price of $8.56 per share.

       July 1997 Interim Financing.  In July 1997, the Company borrowed $250,000
which was repaid out of the proceeds from the Bridge Financing.

      Bridge  Financing.   In  July  1997,  the  Company  completed  the  Bridge
Financing,  whereby  it issued 43 Bridge  Units  ("Bridge  Units") at a purchase
price of $100,000 per Bridge  Unit,  each Bridge Unit  consisting  of a $100,000
principal  amount Bridge Note and a warrant to purchase  25,000 shares of Common
Stock at a purchase price of $8.56 per share. As part of such Bridge  Financing,
the Third  Interim  Financing  Notes  were  converted  into  Bridge  Units.  The
principal amount of the Bridge Notes ($4,300,000) plus interest of approximately
$161,000 was paid in full out of the proceeds of the IPO.


                                      -28-

<PAGE>
         October  1997  Interim   Financing.   In  October  1997,   the  Company
consummated the October 1997 Interim Financing whereby it received the principal
amount of $600,000.  The October 1997  Interim  Financing  was repaid out of the
proceeds of the IPO.

         The Company does not currently  have a line of credit with a commercial
bank.  Under the Loan Agreement,  the Company has outstanding  borrowings in the
aggregate principal amount of approximately  $891,000, such indebtedness secured
by a security  interest in and lien on all of the Company's  assets. An Addendum
to the Loan Agreement provides that HCC, the lender thereunder,  will not demand
payment  under the Loan  Agreement  (and  requires  the  Company  to  maintain a
restricted  Certificate  of Deposit  which was in the amount of  $878,000  as of
December 31,  1997),  until the earlier of March 31, 1998, a material  breach by
the Company under the Addendum or an event of default under the Loan  Agreement.
The Company is obligated  under the Addendum to pay HCC each month  $10,000 plus
accrued   interest  on  the  outstanding   balance  under  the  Loan  Agreement.
Additionally,  as of December 31, 1997, the Company has available $189,000 under
an equipment leasing line of credit

         As of December 31, 1997, the Company's principal  commitments consisted
of obligations under operating and capital leases and employment agreements.  At
that date,  the Company had  approximately  $554,000 in  outstanding  borrowings
under capital leases which are payable through 2001 (see Note 11 of Notes to the
Financial Statements). Pursuant to employment agreements with executive officers
of the  Company,  the  Company is  obligated  to pay  $936,000  and  $460,000 in
salaries for the years ended December 31, 1998 and 1999, respectively.

         As of December 31, 1997, the Company had working capital of $3,794,000.
The Company has had a limited  operating  history as a software  product company
and has not made  significant  sales of its  products.  Therefore,  revenues are
difficult to predict.  Based on its current operating plan, the Company believes
that its current cash and cash  equivalent  position is  sufficient  to meet its
working capital and capital expenditure  requirements for the next eight months.
It is  more  likely  than  not  that  cash  generated  from  operations  will be
insufficient  to satisfy  the  Company's  liquidity  requirements  beyond  eight
months,  and as a result,  the Company  will seek to sell  additional  equity or
convertible debt securities or obtain  additional  credit  facilities.  However,
there can be no assurance  that the Company will be able to consummate  any such
transactions. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders.

Year 2000 Compliance

         The Company has assessed and continues to assess the impact of the Year
2000 issue on its  operations,  including the development of cost estimates for,
and the extent of programming changes required to address,  this issue. Although
final cost estimates have yet to be determined,  the Company  expects that these
Year 2000 costs will not be material to the Company's  expenses  during 1998 and
1999.  The Company does not currently have any  information  concerning the Year
2000 compliance status of its suppliers and customers.  In the event that any of
the

                                      -29-

<PAGE>
Company's  significant  suppliers or customers does not  successfully and timely
achieve Year 2000  compliance,  the Company's  business or  operations  could be
adversely affected.

ITEM 7.        FINANCIAL STATEMENTS

         See Index to Financial Statements.

ITEM 8.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE

         None.


                                      -30-

<PAGE>
                                    PART III

ITEM 9.        DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
               PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The information required by this item is incorporated by reference from
the Company's  definitive  proxy  statement to be filed not later than April 30,
1998 pursuant to Regulation 14A of the General Rules and  Regulations  under the
Securities Exchange Act of 1934 ("Regulation 14A").

ITEM 10.       EXECUTIVE COMPENSATION.

         The information required by this item is incorporated by reference from
the Company's  definitive  proxy  statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.

ITEM 11.       SECURITY OWNERSHIP OF CERTAIN
               BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this item is incorporated by reference from
the Company's  definitive  proxy  statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this item is incorporated by reference from
the Company's  definitive  proxy  statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.


                                      -31-

<PAGE>

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K.

(a)   Exhibits

Exhibit
Number              Exhibits
------              --------
       3.1          Certificate of Incorporation of the Company (Incorporated by
                    reference  to Exhibit 3.1 to the  Registration  Statement on
                    Form SB-2, No. 333-34667).
       3.2          By-laws  of the  Registrant,  as  amended  (Incorporated  by
                    reference  to Exhibit 3.2 to the  Registration  Statement on
                    Form SB-2, No. 333-34667).
       4.1          Specimen   Certificate  of  the  Registrant's  Common  Stock
                    (Incorporated   by   reference   to   Exhibit   4.1  to  the
                    Registration Statement on Form SB-2, No. 333-34667).
       4.2          Form of  Representative's  Purchase  Option  granted  to GKN
                    Securities  Corp.  (Incorporated by reference to Exhibit 4.2
                    to the Registration Statement on Form SB-2, No. 333-34667).
       4.3          Form of  Warrant  issued  in  connection  with the July 1997
                    Private Placement  (Incorporated by reference to Exhibit 4.3
                    to the Registration Statement on Form SB-2, No. 333-34667).
       4.4          Form of Lock-up  Agreement  (Incorporated  by  reference  to
                    Exhibit 4.5 to the Registration  Statement on Form SB-2, No.
                    333-34667).
      10.1          1991 Incentive Stock Option Plan  (Incorporated by reference
                    to Exhibit 10.1 to the Registration  Statement on Form SB-2,
                    No. 333-34667).
      10.2          Form of Stock Option  Agreement  for  Non-Qualified  Options
                    granted to Advisors  (Incorporated  by  reference to Exhibit
                    10.2  to  the  Registration  Statement  on  Form  SB-2,  No.
                    333-34667).
      10.3          Employment  Agreement,  dated  as of  June 1,  1997,  by and
                    among, the Company and Mark A. Chroscielewski  (Incorporated
                    by reference to Exhibit 10.3 to the  Registration  Statement
                    on Form SB-2, No. 333-34667).
      10.4          Employment  Agreement,  dated as of April 21,  1997,  by and
                    among,  the  Company  and  Deepak  Mohan   (Incorporated  by
                    reference to Exhibit 10.4 to the  Registration  Statement on
                    Form SB-2, No. 333-34667).
      10.5          Employment Agreement, dated as of May 1, 1997, by and among,
                    the Company and Daniel M. Pess (Incorporated by reference to
                    Exhibit 10.5 to the Registration Statement on Form SB-2, No.
                    333-34667).
      10.6          Employment Agreement, dated as of May 8, 1996, by and among,
                    the Company and Andre Szykier  (Incorporated by reference to
                    Exhibit 10.6 to the Registration Statement on Form SB-2, No.
                    333-34667).
      10.7          Employment Agreement,  dated as of September 1, 1997, by and
                    among,  the Company and Robert A. Thompson  (Incorporated by
                    reference to Exhibit 10.7 to the  Registration  Statement on
                    Form SB-2, No. 333-34667).

                                      -32-

<PAGE>

      10.8          Employment  Agreement,  dated as of October 6, 1997,  by and
                    among,  the Company and Robert V. Aloisio  (Incorporated  by
                    reference to Exhibit 10.8 to the  Registration  Statement on
                    Form SB-2, No. 333-34667).
      10.9          Employment  Agreement,  dated as of October 14, 1997, by and
                    among,  the Company  and Alan W.  Kaufman  (Incorporated  by
                    reference to Exhibit 10.9(a) to the  Registration  Statement
                    on Form SB-2, No. 333-34667).
      10.10         HCC Loan  Agreement  dated March 31, 1992 and Addendum dated
                    May 8, 1996 (Incorporated by reference to Exhibit 10.9(b) to
                    the Registration Statement on Form SB-2, No. 333-34667).
      10.11         Software Licensing  Agreement between Amdahl Corporation and
                    the  Registrant  dated  November 27, 1996  (Incorporated  by
                    reference to Exhibit 10.10 to the Registration  Statement on
                    Form SB-2, No. 333-34667).
      10.12         Value Added Reseller  Software  Licensing  Agreement between
                    Stratos,  Strategic  Tools & Services and the Company  dated
                    September  9, 1997  (Incorporated  by  reference  to Exhibit
                    10.11  to the  Registration  Statement  on  Form  SB-2,  No.
                    333-34667).
      10.13         Value Added Reseller  Software  Licensing  Agreement between
                    Worldnet Consulting, S.A. and the Company dated September 9,
                    1997  (Incorporated  by  reference  to Exhibit  10.12 to the
                    Registration Statement on Form SB-2, No. 333-34667).
      10.14         Software  Distribution  Agreement  between   Hewlett-Packard
                    Company   and  the   Company   dated   September   10,  1997
                    (Incorporated   by  reference   to  Exhibit   10.13  to  the
                    Registration Statement on Form SB-2, No. 333-34667).
      *11.1         Computation of Pro Forma Net Loss Per Common Share.
       *27          Financial Data Schedule

---------------------------
*     Filed herewith.
(b)   Reports on Form 8-K
      None.

                                      -33-

<PAGE>
      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                    CROSSZ SOFTWARE CORPORATION


Dated:   March 30, 1998             By:     /s/ Alan W. Kaufman
                                            -------------------
                                            Alan W. Kaufman
                                            President
                                            Chief Executive Officer

                                POWER OF ATTORNEY

         The CrossZ  Software  Corporation and each of the undersigned do hereby
appoint  Alan W. Kaufman and Daniel M. Pess and each of them  severally,  its or
his true and lawful attorney to execute on behalf of CrossZ Software Corporation
and the  undersigned any and all amendments to this Annual Report on Form 10-KSB
and to file the same with all exhibits thereto and other documents in connection
therewith,  with the Securities and Exchange Commission;  each of such attorneys
shall have the power to act hereunder with or without the other.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated:


        Signature                     Title                         Date
        ---------                     -----                         ----


/s/ Alan W. Kaufman
----------------------      President, Chief Executive Officer   March 30, 1998
Alan W. Kaufman             and Director (Principal Executive
                            Officer)


/s/ Daniel M. Pess
----------------------      Senior Vice President - Finance      March 30, 1998
Daniel M. Pess              and Chief Financial Officer
                            (Principal Financial and
                            Accounting Officer)


/s/ Andre Szykier
---------------------       Director                             March 30, 1998
Andre Szykier


                            Chairman of the Board                March   , 1998
----------------------
Mark A. Chroscielewski


                                      -34-

<PAGE>


/s/ Rino Bergonzi
---------------------
Rino Bergonzi               Director                             March 30, 1998


/s/ Scott T. Jones
---------------------       Director                             March 30, 1998
Scott T. Jones



                                      -35-

<PAGE>

CROSSZ SOFTWARE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996



<PAGE>





                          INDEX TO FINANCIAL STATEMENTS

                                                                           Page
                                                                           ----

Report of Independent Accountants...........................................F-2
Balance Sheet as of December 31, 1997.......................................F-3
Statement of Operations for the years ended December 31, 1997 and 1996......F-4
Statement of Changes in Stockholders' Equity (Deficit) for the years ended
  December 31, 1997 and 1996................................................F-5
Statement of Cash Flows for the years ended December 31, 1997 and 1996......F-6
Notes to the Financial Statements...........................................F-7




                                       F-1

<PAGE>

                       Report of Independent Accountants

To the Board of Directors
and Stockholders of
CrossZ Software Corporation

In our opinion,  the  accompanying  balance sheet and the related  statements of
operations,  of  changes in  stockholders'  equity  (deficit)  and of cash flows
present  fairly,  in all material  respects,  the  financial  position of CrossZ
Software  Corporation  (the  "Company") at December 31, 1997, and the results of
its  operations  and its cash flows for the two years  then ended in  conformity
with generally accepted accounting  principles.  These financial  statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial  statements based on our audits.  We conducted our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements,  the Company has suffered recurring losses from operations
and has  incurred  negative  cash flows  from  operating  activities  that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 2. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



PRICE WATERHOUSE LLP
Melville, New York
February 19, 1998



                                   F-2

<PAGE>
CROSSZ SOFTWARE CORPORATION

BALANCE SHEET
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                                  1997
<S>                                                                                      <C>
ASSETS
Current assets
     Cash and cash equivalents                                                           $      5,437,350
     Accounts receivable, net of allowance for doubtful
          accounts of $30,000                                                                     499,767
     Restricted certificate of deposit                                                            877,839
     Prepaid expenses and other current assets                                                     48,254
                                                                                         -----------------

              Total current assets                                                              6,863,210

Property and equipment, net                                                                     1,248,261
Deposits and other assets                                                                          85,274
                                                                                         -----------------

              Total assets                                                               $      8,196,745
                                                                                         =================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
     Accounts payable                                                                    $        723,421
     Accrued expenses                                                                             918,691
     Deferred revenue                                                                              30,035
     Current portion of loan payable to stockholders                                              891,335
     Customer advance                                                                             300,000
     Capital lease obligations due within one year                                                205,839
                                                                                         -----------------

              Total current liabilities                                                         3,069,321

Capital lease obligations                                                                         347,960
Deferred rent                                                                                     268,933
                                                                                         -----------------

              Total liabilities                                                                 3,686,214
                                                                                         -----------------

Stockholders' equity
     Preferred stock, 2,000,000 shares authorized; none issued and outstanding
     Common stock, $0.001 par value: 30,000,000 shares
          authorized; 5,110,605 shares issued and outstanding                                       5,111
     Additional paid-in-capital                                                                30,384,706
     Accumulated deficit                                                                      (25,866,986)
     Receivable from stockholder                                                                  (12,300)
                                                                                         -----------------

              Total stockholders' equity                                                        4,510,531
                                                                                         -----------------

Commitments and contingencies (Notes 2, 13 and 15)

              Total liabilities and stockholders' equity                                 $      8,196,745
                                                                                         =================
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-3

<PAGE>



CROSSZ SOFTWARE CORPORATION
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                                 1997                     1996

<S>                                                       <C>                       <C>
Revenues
     Software licenses                                    $    596,345              $    851,150
     Services and maintenance                                  415,814                 1,051,828
                                                          ------------              ------------

              Total revenues                                 1,012,159                 1,902,978

Cost of revenues
     Software licenses                                          74,605                   102,138
     Services and maintenance                                  131,190                   376,289
                                                          ------------              ------------

              Total cost of revenues                           205,795                   478,427
                                                          ------------              ------------

Gross profit                                                   806,364                 1,424,551
                                                          ------------              ------------

Operating expenses
     Sales and marketing                                     4,575,735                 3,145,160
     Research and development                                2,523,127                 1,791,597
     General and administrative                              1,914,252                 1,140,003
                                                          ------------              ------------

              Total operating expenses                       9,013,114                 6,076,760
                                                          ------------              ------------

Loss from operations                                        (8,206,750)               (4,652,209)

Interest income                                                 77,979                    88,288
Interest expense                                              (805,761)                 (355,314)
Other income                                                       542                     1,300
                                                          ------------              ------------

Loss before extraordinary item                              (8,933,990)               (4,917,935)

Extraordinary loss from early extinguishment of debt        (1,629,494)                     --
                                                          ------------              ------------

Net loss                                                  $(10,563,484)             $ (4,917,935)
                                                          ------------              ------------

Basic loss per share before extraordinary item            $      (3.19)             $      (2.67)
                                                          ------------              ------------

Extraordinary item                                        $       (.58)             $       --
                                                          ------------              ------------

Basic net loss per share                                  $      (3.77)             $      (2.67)
                                                          ------------              ------------

Weighted average shares used in basic per share
     computation (Note 1)                                    2,802,532                 1,839,418
                                                          ------------              ------------
</TABLE>


   The accompanying notes are an integral part of these financial statements.
                                       F-4

<PAGE>

--------------------------------------------------------------------------------

CROSSZ SOFTWARE CORPORATION


STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                     Series A Convertible       Series B Convertible      Series C Convertible
                                                       Preferred Stock            Preferred Stock            Preferred Stock
                                                   --------------------------------------------------------------------------------
                                                      Shares        Amount       Shares        Amount      Shares         Amount
                                                   --------------------------------------------------------------------------------

<S>                                                   <C>       <C>              <C>        <C>           <C>          <C>
Balance at January 1, 1996                            39,175    $       39       29,101      $     29      188,731     $      188

Accretion of excess of  redemption
     value of Series D preferred stock
     over fair value at issuance date
Issuance of options and warrants
     on Series D preferred stock
Issuance of Series C preferred stock:
     For cash at $9.60 per share                                                                            13,400             13
     In exchange for notes payable                                                                           1,147              1
     For compensation payable
          to related parties                                                                                 5,672              6
Conversion of Series A and B
     preferred stock to Series C                      (6,593)           (6)     (11,364)          (11)      21,548             22
Common stock options exercised
Net loss
                                                   ----------   -----------   ----------   -----------   ----------   ------------

Balance at December 31, 1996                          32,582            33       17,737            18      230,498            230

Issuance of common stock warrants in
connection with bridge financing
Accretion of excess of redemption value of
     Series D preferred stock over fair value
     at issuance date
Issuance of options on Series D
     preferred stock
Conversion of preferred stock to
     common stock upon initial public offering       (32,582)          (33)     (17,737)          (18)    (230,498)          (230)
Conversion of Series D preferred stock to
     common stock upon initial public offering
Issuance of common stock upon initial public
     offering, net of issuance cost of $2,530,426
Repurchase of common stock
Issuance of common stock options for
     consulting services
Common stock options and warrants exercised
Net loss
                                                   ----------   -----------   ----------   -----------   ----------   ------------

Balance at December 31, 1997                               -    $         -            -   $         -            -    $         -
                                                   --------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

                                                         Common Stock       Additional                  Receivable        Total
                                                 -------------------------   Paid-in      Accumulated      from       Stockholders'
                                                      Shares     Amount      Capital        Deficit     Stockholder (Deficit) Equity
                                                 ---------------------------------------------------------------------------------

<S>                                                 <C>       <C>       <C>            <C>             <C>        <C>
Balance at January 1, 1996                            791,640   $   792   $  3,556,986   $  (8,863,164)  $      -   $    (5,305,130)

Accretion of excess of  redemption
     value of Series D preferred stock
     over fair value at issuance date                                                         (562,839)                    (562,839)
Issuance of options and warrants
     on Series D preferred stock                                               234,700                                      234,700
Issuance of Series C preferred stock:
     For cash at $9.60 per share                                               128,623                                      128,636
     In exchange for notes payable                                              11,007                                       11,008
     For compensation payable
          to related parties                                                    54,442                                       54,448
Conversion of Series A and B
     preferred stock to Series C                                                    (5)                                           -
Common stock options exercised                         71,950        72         49,505                    (12,300)           37,277
Net loss                                                                                    (4,917,935)                  (4,917,935)
                                                   -----------  --------  -------------  --------------  ---------  ----------------

Balance at December 31, 1996                          863,590       864      4,035,258     (14,343,938)   (12,300)      (10,319,835)

Issuance of common stock warrants in
connection with bridge financing                                             1,512,397                                    1,512,397
Accretion of excess of redemption value of
     Series D preferred stock over fair value
     at issuance date                                                                         (917,571)                    (917,571)
Issuance of options on Series D
     preferred stock                                                           363,800                                      363,800
Conversion of preferred stock to
     common stock upon initial public offering        331,523       331            (50)                                           -
Conversion of Series D preferred stock to           1,365,790     1,366     11,583,231                                   11,584,597
     common stock upon initial public offering
Issuance of common stock upon initial public
     offering, net of issuance cost of $2,530,426   2,500,000     2,500     12,467,074                                   12,469,574
Repurchase of common stock                             (7,368)       (7)                       (41,993)                     (42,000)
Issuance of common stock options for
     consulting services                                                       321,470                                      321,470
Common stock options and warrants exercised            57,070        57        101,526                                      101,583
Net loss                                                                                   (10,563,484)                 (10,563,484)
                                                   -----------  --------  -------------  --------------  ---------  ----------------

Balance at December 31, 1997                         5,110,605  $  5,111  $  30,384,706  $ (25,866,986)  $(12,300)  $     4,510,531
                                                   ---------------------------------------------------------------------------------

</TABLE>


   The accompanying notes are an integral part of these financial statements.
                                       F-5

<PAGE>
CROSS/Z INTERNATIONAL, INC.

STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                            1997                      1996

Cash flows from operating activities
<S>                                                                                     <C>                     <C>
     Net loss                                                                           $(10,563,484)           $ (4,917,935)
     Adjustments to reconcile net loss to net cash used in
          operating activities
              Depreciation and amortization                                                  373,434                 236,751
              Write off of leasehold improvements                                              5,825                    --
              Amortization of debt discount                                                  318,705                 112,200
              Amortization of debt issuance cost                                             100,432                    --
              Extraordinary loss on extinguishment of debt                                 1,629,494                    --
              Options issued for consulting services                                         685,270                 122,500
              Changes in assets and liabilities
                  Accounts receivable, net                                                   320,540                (237,189)
                  Prepaid expenses and other current assets                                  (17,735)                (22,983)
                  Deposits and other assets                                                  (53,318)                   (505)
                  Accounts payable and accrued expenses                                     (166,078)               (881,074)
                  Deferred rent                                                               13,293                  83,336
                  Deferred revenue                                                          (102,264)                (36,772)
                                                                                        ------------            ------------

                  Net cash used in operating activities                                   (7,455,886)             (5,541,671)
                                                                                        ------------            ------------

Cash flows from investing activities
     Acquisitions of property and equipment                                                 (590,608)               (618,993)
     Note receivable from stockholder                                                        (42,000)                   --
     Purchase of restricted certificate of deposit                                           (37,785)               (840,054)
                                                                                        ------------            ------------

                  Net cash used in investing activities                                     (670,393)             (1,459,047)
                                                                                        ------------            ------------

Cash flows from financing activities
     Proceeds from issuance of Series D preferred stock, net                                    --                 8,643,418
     Proceeds from issuance of Series C preferred stock, net                                    --                   128,637
     Proceeds from issuance of common stock, net                                          12,571,157                  37,277
     Proceeds from Interim and Bridge financings payable, net                              5,313,766                    --
     Repayment of Interim and Bridge financings payable                                   (5,850,000)                   --
     Repayment of notes payable                                                              (25,000)               (238,992)
     Proceeds from loan payable to stockholders                                                 --                    15,737
     Repayment of loan payable to stockholders                                              (120,000)               (132,000)
     Payments of capital lease obligations                                                  (254,979)               (144,200)
     Proceeds from sale-leaseback transaction                                                561,119                    --
                                                                                        ------------            ------------

                  Net cash provided by financing activities                               12,196,063               8,309,877
                                                                                        ------------            ------------

Net increase in cash and cash equivalents                                                  4,069,784               1,309,159

Cash and cash equivalents at beginning of year                                             1,367,566                  58,407
                                                                                        ------------            ------------

Cash and cash equivalents at end of year                                                $  5,437,350            $  1,367,566
                                                                                        ============            ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       F-6

<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.        Organization and Summary of Significant Accounting Policies

         Organization
         Cross/Z  International,  Inc. ("CZI") was incorporated in California on
         February 6, 1989.  In August 1997,  CZI  incorporated  a company in the
         state of  Delaware  under the name  CrossZ  Software  Corporation  (the
         "Company").  In connection with the Company's IPO (the "IPO") under the
         Securities Act of 1933, as amended, and pursuant to a plan of corporate
         reorganization,  CZI  merged  with  the  Company.  The  Company  is the
         surviving entity and assumed the name CrossZ Software Corporation.  The
         Company   develops,   markets   and   supports   proprietary   business
         intelligence  software  solutions that enable business managers to make
         strategic decisions based on their corporate data.

         Summary of significant accounting policies

         Restatement and reclassification for reverse stock splits
         On October 29, 1997, the Company's  stockholders ratified a one-for-two
         reverse  stock  split on all common and  preferred  stock.  On July 17,
         1997, the Company's  stockholders ratified a one-for-four reverse stock
         split on all  common  and  preferred  stock . All  share  and per share
         amounts affecting net loss per share, weighted average number of common
         and common  equivalent shares  outstanding,  common stock and preferred
         stock issued and outstanding,  additional paid-in-capital and all other
         stock  transactions  presented in these financial  statements have been
         restated  to  reflect  the  one-for-two  reverse  stock  split  and the
         previous one-for-four reverse stock split.

         Net loss per common share
         The Company  adopted  Statement of Financial  Accounting  Standards No.
         128,  "Earnings  per Share" ("SFAS 128")  beginning  with the Company's
         fourth quarter of 1997.

         Basic net loss per common  share is computed  by dividing  net loss for
         the  period  by the sum of the  weighted  average  number  of shares of
         common stock issued and outstanding after conversion of all outstanding
         preferred   stock   effected   contemporaneously   with  the  IPO.  All
         outstanding  shares  of  Series  A,  B, C and D  Preferred  Stock  were
         converted as though such  conversion  occurred at the  beginning of the
         earliest  period  presented  or the date of issuance in the case of the
         Series D.  Historical net loss per share has not been  presented  since
         such  amount is not  deemed  to be  meaningful  due to the  significant
         change in the Company's capital structure  resulting from the Company's
         IPO.

         At December  31,  1997,  outstanding  options and  warrants to purchase
         2,532,177  shares of common stock,  with exercise  prices  ranging from
         $.96 to $8.56 could  potentially  dilute basic earnings per share. Such
         options and warrants have not been included in the  computation  of net
         loss per share  because to do so would have been  antidilutive  for the
         periods presented.

         Cash and cash equivalents

         The Company  considers  all highly  liquid  investments  with  original
         maturities of three months or less to be cash equivalents.

                                   F-7
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
         Revenue recognition
         The  Company   recognizes  revenue  in  accordance  with  the  American
         Institute  of  Certified  Public  Accountants  ("AICPA")  Statement  of
         Position  91-1 on Software  Revenue  Recognition.  Revenue from product
         licensing  is  generally  recognized  after  execution  of a  licensing
         agreement  and shipment of the product,  provided  that no  significant
         vendor  obligations  remain  and the  resulting  receivable  is  deemed
         collectable by management.  Service revenues  consists of data analysis
         using the Company's  proprietary  software performed for customers on a
         project  or  contract  basis  and are  recognized  over the term of the
         respective agreements.  Maintenance revenues consist of ongoing support
         and product  updates and are  recognized  ratably  over the term of the
         contract, generally twelve months.

         In October  1997,  the AICPA issued  Statement  of Position  97-2 ("SOP
         97-2") on software revenue  recognition.  The Company believes that the
         adoption of this  statement  will not have a significant  impact on the
         Company.  This statement is effective for fiscal years  beginning after
         December 15, 1997.

         Depreciation and amortization
         Depreciation  and  amortization  is computed  using the  straight  line
         method over the estimated  useful lives of the assets,  generally three
         to five years.  Assets  acquired  under  capital  leases and  leasehold
         improvements  are  amortized  using the  straight-line  method over the
         shorter of the estimated useful lives of the assets or the terms of the
         related leases.

         Software development costs
         Statement of Financial  Accounting Standards No. 86 "Accounting for the
         Costs of Computer  Software to be Sold,  Leased or Otherwise  Marketed"
         ("SFAS 86") requires the capitalization of certain software development
         costs once technological feasibility is established,  which the Company
         defines  as the  completion  of a working  model.  To date,  the period
         between   achieving   technological   feasibility   and   the   general
         availability  of such software has been short and software  development
         costs   qualifying   for   capitalization   have  been   insignificant.
         Accordingly, the Company has expensed all software development costs as
         incurred.

         Advertising
         Advertising costs are included in sales and marketing  expenses and are
         expensed  as  incurred.   To  date  advertising  costs  have  not  been
         significant.

         Income taxes
         The Company  provides for income taxes in accordance  with Statement of
         Financial  Accounting  Standards No. 109, "Accounting for Income Taxes"
         ("SFAS 109").  Income taxes are computed  using the asset and liability
         method.  Under the asset and  liability  method  specified by SFAS 109,
         deferred income tax assets and liabilities are determined  based on the
         differences between the financial reporting and tax bases of assets and
         liabilities and are measured using the currently  enacted tax rates and
         laws.

                                      F-8

<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         Use of estimates
         These  financial  statements  have been  prepared  in  conformity  with
         generally  accepted  accounting  principles which require management to
         make  reasonable  estimates  and  assumptions  that affect the reported
         amounts of assets and  liabilities and disclosure of  contingencies  at
         the date of the financial statements.  Actual results could differ from
         those estimates.

         Fair value of financial instruments
         The carrying value of cash and cash equivalents,  accounts  receivable,
         accounts  payable and accrued expenses  approximates  fair value due to
         the relatively  short maturity of these  instruments.  Loans payable to
         stockholder  are not traded in the open  market and a market  price for
         such loans are not readily available.

         Concentrations of credit risk
         Financial   instruments  which  potentially   subject  the  Company  to
         significant  concentrations of credit risk consist principally of cash,
         cash equivalents and accounts  receivable.  The Company places its cash
         with high quality financial institutions.  The Company performs ongoing
         credit   evaluations  of  its  customers  and  generally   requires  no
         collateral.  The Company maintains reserves for potential credit losses
         and historically such losses have not been significant.

         Reclassification
         Certain prior year amounts have been reclassified to conform with their
         1997 presentation.

         Accounting for stock-based compensation
         In October 1995,  the Financial  Accounting  Standards  Board  ("FASB")
         issued Statement of Financial Accounting Standards No. 123, "Accounting
         for Stock-Based Compensation" ("SFAS 123"), effective for the Company's
         fiscal year beginning in 1996.  SFAS 123 established a fair value based
         method of accounting for stock-based  compensation  plans.  The Company
         has  chosen  to adopt the  disclosure  requirements  of SFAS  123,  and
         continue  to  record   stock-based   compensation  in  accordance  with
         Accounting  Principles  Board  Opinion  No. 25,  "Accounting  for Stock
         Issued to  Employees"  ("APB  25").  Under APB 25, the  Company has not
         recognized compensation expense with respect to such awards because the
         exercise  price of options  granted to employees has  approximated  the
         fair market value of the common stock at the respective grant dates.

         New accounting pronouncements

         Statement  of  Financial   Accounting  Standards  No.  130,  "Reporting
         Comprehensive  Income"  ("SFAS 130") On June 30, 1997,  the FASB issued
         SFAS 130.
         This  statement  establishes  standards  for  reporting  and display of
         comprehensive income and its components (revenues,  expenses, gains and
         losses) in a full set of general-purpose financial statements. SFAS 130
         requires that an enterprise (a) classify  items of other  comprehensive
         income by their  nature in a  financial  statement  and (b) display the
         accumulated  balance  of other  comprehensive  income  separately  from
         retained earnings and additional  paid-in capital in the equity section
         of a statement of financial position.


                                       F-9

<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         This statement is effective for fiscal years  beginning  after December
         15, 1997.  Reclassification of financial statements for earlier periods
         provided for comparative purposes is required.  It is not expected that
         the adoption of SFAS 130 will have a material impact on the Company.

         Statement of Financial  Accounting Standards No. 131, "Disclosure about
         Segments of an Enterprise" ("SFAS 131")
         In June 1997,  the FASB issued SFAS No. 131.  This  statement  requires
         that public  business  enterprises  report  certain  information  about
         operating  segments in complete  sets of  financial  statements  of the
         enterprise and in condensed financial  statements of interim periods to
         stockholders.   It  also  requires  that  enterprises   report  certain
         information about their products and services,  the geographic areas in
         which  they  operate  and their  major  customers.  This  statement  is
         effective  for fiscal years  beginning  after  December  15, 1997.  The
         effect of the  adoption  of this  statement  is not  expected to have a
         significant impact on the Company.

2.        Liquidity and Business Risks

         The Company has incurred operating losses since inception, has incurred
         negative cash flows from  operating  activities  and had an accumulated
         deficit of  $25,866,986  and  $14,343,938  as of December  31, 1997 and
         1996, respectively.  The Company has had a limited operating history as
         a software  product company and has not made  significant  sales of its
         products.  Therefore,  revenues are difficult to predict.  Based on its
         current  operating plan, the Company believes that its current cash and
         cash equivalent  position is sufficient to meet its working capital and
         capital  expenditure  requirements  for the next eight months.  If cash
         generated  from  operations  is  insufficient  to satisfy the Company's
         liquidity requirements, the Company will seek to sell additional equity
         or convertible debt securities or obtain additional credit  facilities.
         The sale of additional  equity or  convertible  debt  securities  could
         result in additional dilution to the Company's stockholders.


                                      F-10
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


3.       Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                                                           Year Ended
                                                                                          December 31,
                                                                                    1997                1996

<S>                                                                            <C>                 <C>
         Interest paid during the period                                       $     374,691       $     209,787
         Schedule of non cash investing and financing activities:
              Capital lease obligations entered into during the period               561,119              99,341
              Series C Preferred Stock, issued for:
                   Notes payable                                                           -              11,008
                   Compensation payable to related parties                                 -              54,448
              Series D Preferred Stock, issued for:
                   Notes payable                                                           -             575,000
                   Compensation payable to related parties                                 -             720,767
                   Consulting services                                                     -             165,000
                   Dividends                                                         917,571             562,839
              Series D Preferred options issued for consulting services              321,470             234,700
              Common stock warrants issued in connection with
                   Bridge Financing                                                1,512,397                   -
              Common stock options issued for consulting services                    363,800                   -
              Common stock retired in satisfaction of note receivable                 42,000                   -
</TABLE>




4.       Property and Equipment

         Property and equipment (net) consisted of the following:

                                                                 December 31,
                                                                     1997

         Computer equipment and software                        $  1,900,010
         Furniture and fixtures                                      204,289
         Office equipment                                            114,096
         Leasehold improvements                                       19,578
                                                                -------------

                                                                   2,237,973

         Less: accumulated depreciation and amortization             989,712
                                                                -------------

                                                                $  1,248,261
                                                                -------------

                                      F-11
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5.       Accrued Expenses

         Accrued expenses included the following:

                                                             December 31,
                                                                 1997

         Executive compensation                            $     266,039
         Compensation and related benefits                       234,586
         Consulting and professional fees                        124,460
         Interest                                                 10,268
         Commissions                                              19,708
         Other                                                   263,630
                                                           --------------

                                                           $     918,691
                                                           --------------

6.        Borrowing Arrangements

         During  1995,  the  Company  issued  several  promissory  notes  to its
         stockholders,  originally due within six months and with interest rates
         ranging  from 12% to 24%.  During  1996,  $113,992  of these notes were
         repaid and  $311,008  was  converted  to equity,  of which  $11,008 was
         converted  into 1,147  shares of Series C Preferred  Stock at $9.60 per
         share  and  $300,000  was  converted  into  35,046  shares  of Series D
         Preferred  Stock at $8.56 per share.  The  balance of these  notes were
         paid out of the proceeds of the IPO.

         Loan payable to stockholder
         In May 1992, the Company entered into a borrowing arrangement whereby a
         stockholder  agreed to advance the Company funds at an interest rate of
         18% per annum.  Such  borrowings were  collateralized  by the Company's
         accounts receivable. In May 1996, the Company was in default of certain
         provisions  of the  agreement,  at which time the  stockholder  and the
         Company  amended  the  agreement  to reduce  the  interest  rate to the
         greater  of prime  plus 3% or 12% per annum and delay the time that the
         stockholder  could  demand  repayment  until  March  1998.  The revised
         agreement  requires  the  Company  to set aside  funds in a  restricted
         account to the extent that the outstanding borrowings exceed 80% of the
         Company's accounts  receivable and to make monthly payments of $10,000,
         plus  interest,  until March 1998 at which time the entire balance will
         be payable. At December 31, 1997, the Company has set aside $877,839 in
         a  restricted  certificate  of  deposit  relating  to this  obligation.
         Interest  expense  related to this  agreement was $114,634 and $190,314
         for 1997 and 1996, respectively.

         Interim financing
         In May 1997, the Company  received a $500,000 loan with interest at 10%
         per annum, from existing  stockholders.  The loan was repaid out of the
         proceeds of the Bridge Financing, as described below.

         In  June  1997,  the  Company   received   additional  loans  from  two
         stockholders  each  consisting  of a $100,000  promissory  note bearing
         interest of 10% per annum  through  September 30, 1997 and


                                      F-12
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         13% annually  thereafter and attached warrants to purchase up to 23,850
         shares of common stock at $8.56 per share. These notes were paid out of
         the proceeds of the IPO.

         In July 1997, the Company borrowed $250,000 which was repaid out of the
         proceeds from the Bridge Financing.

         Bridge Financing
         On July 30, 1997, the Company  completed a $4,300,000  Bridge Financing
         (the "Bridge  Financing").  The gross proceeds to the Company from such
         financing were approximately $3,764,000,  net of approximately $536,000
         of issuance costs.

         In connection with the Bridge  Financing,  the Company issued 43 units,
         each consisting of a $100,000 promissory note (the "Bridge Note") and a
         warrant  (the "Bridge  Warrant")  allowing the holder to purchase up to
         25,000  shares of the  Company's  common  stock at a price of $8.56 per
         share.  The Bridge  Warrants are  exercisable on or after July 30, 1998
         and expire on July 30,  2003.  The Bridge Notes  accrued  interest at a
         rate of 10% per annum from July 30, 1997  through  September  30, 1997,
         and at a rate of 13% per  annum  thereafter,  and were  paid out of the
         proceeds  of the IPO.  As an  incentive  for early  participation,  the
         Company issued to certain  investors,  warrants to purchase up to 6,309
         shares of common  stock at a price of $8.56,  in addition to the Bridge
         Warrants that were included in the bridge units. A portion of the gross
         proceeds from the Bridge Financing was allocated to the Bridge Warrants
         based on their  estimated  fair market value and resulted in $1,512,397
         of original  issue  discount and a  corresponding  amount of additional
         paid in capital.

         In October 1997,  the Company  issued  $600,000 of principal  amount of
         unsecured  promissory  notes to stockholders of the Company.  The notes
         bore interest at 15% per annum and were paid out of the proceeds of the
         IPO.

         On November  25,  1997,  the  Company  repaid the holders of the Bridge
         Notes,  out of the  proceeds of the  Company's  IPO.  Accordingly,  the
         Company  recorded an  extraordinary  loss of $1,629,494  related to the
         early  extinguishment of debt. The extraordinary  loss was comprised of
         $1,193,692  related to unamortized  deferred debt discount and $435,802
         of  unamortized  deferred  debt  issuance  costs  related to the Bridge
         Notes.

7.        Stockholders' Equity

         Common stock

         On November  20, 1997,  the  Company's  IPO of 2,500,000  shares of its
         common stock was declared effective,  which resulted in net proceeds to
         the Company of $12,469,574 before repayment of the Bridge Financing. As
         of the closing date of the offering,  all of the Company's  Convertible
         Preferred Stock and Mandatorily  Redeemable Convertible Preferred Stock
         outstanding  was converted into 331,523 and 1,365,790  shares of common
         stock, respectively.

                                      F-13
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         At December  31,  1996,  warrants to purchase  56,563  shares of common
         stock were  outstanding,  with  exercise  prices  ranging from $2.40 to
         $22.00  per  share,  and were  immediately  exercisable.  During  1997,
         warrants to purchase a total of 30,000 shares were exercised, resulting
         in net  proceeds  to the  Company  of  $72,000.  The  remainder  of the
         warrants expired upon completion of the Company's IPO.

         During  December  1997, the Company  granted  options to members of the
         Advisory  Committee to purchase up to 200,000  shares of common  stock.
         All  options  have  an  exercise  price  of  $6.00  per  share  and are
         immediately exercisable.  The Company has recognized consulting expense
         in its results of  operations  of $272,000 for the year ended  December
         31, 1997 related to these options.

         Also during 1997, a member of the Board of Directors  surrendered 7,386
         shares of the Company's  common stock as repayment of a note receivable
         due the Company in the amount of $42,000.  Such shares were  retired in
         December 1997.

         Preferred stock

         Authorization of additional preferred stock
         In August 1997, the Company  authorized a class of 2,000,000  shares of
         preferred  stock which may be issued by the Board of  Directors on such
         terms and with such rights,  preferences and  designations as the Board
         may determine  without any vote of the  stockholders.  Issuance of such
         preferred   stock,   depending   upon  the  rights,   preferences   and
         designations  thereof,  may have the effect of  delaying,  deterring or
         preventing a change in control of the Company.  Issuance of  additional
         shares of common stock could result in the dilution of the voting power
         of the common stock  purchased in the  Offering.  In addition,  certain
         "anti-takeover"  provisions of the Delaware  General  Corporation  Law,
         among other  things,  may restrict the ability of the  stockholders  to
         expect a merger or  business  combination  or to obtain  control of the
         Company.

         At December 31, 1997,  the Company has authorized  2,000,000  shares of
         undesignated  preferred  stock.  At December 31, 1996,  the Company had
         authorized  17,395,012  shares of preferred stock, of which 260,669 had
         been  designated  Series A Convertible  Preferred  Stock  ("Series A");
         204,913  had been  designated  Series  B  Convertible  Preferred  Stock
         ("Series  B");  2,898,837  had been  designated  Series  C  Convertible
         Preferred  Stock  ("Series  C");  and  14,030,593  had been  designated
         Mandatorily  Redeemable  Series D Convertible  Preferred Stock ("Series
         D").

         During  1996,  the  Company  sold  1,022,196  shares of Series D, which
         resulted  in net  proceeds  of  $8,643,418.  In  addition,  the Company
         converted  various  borrowings  and  compensation  liabilities  due  to
         related parties,  totaling  $1,295,767 into 151,374 shares of Series D,
         and  also  issued  19,276  shares  of  Series  D in  satisfaction  of a
         liability  of $165,000  due for  consulting  services.  At December 31,
         1996, a total of  1,258,598  shares of Series D were  outstanding.  The
         redemption  value of the  Series D was  $8.56.  Holders of the Series D
         were  entitled  to  receive   noncompounded   cumulative   preferential
         dividends,  payable in additional shares, at a rate equal to 10% of the
         redemption  value  of  Series  D. In the  event of  liquidation  of the
         Company, the Series D holders were entitled,  under certain conditions,
         to receive $8.56 per share, plus any accrued and unpaid  dividends.  On
         November 25, 1997,  the Company  completed the IPO of its common stock.
         At that time, all issued and outstanding Series D shares, together with
         all

                                      F-14
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         accreted  shares  of  Series  D were  converted  into an  aggregate  of
         1,365,790 shares of common stock.

         During  April 1996,  the Company  issued  Series D warrants to purchase
         31,250 shares of Series D to investors who had advanced $500,000 to the
         Company prior to the initial closing of the Series D private placement.
         The  warrants  were  immediately  exercisable  at a price of $8.56  and
         expired  five years from their date of  issuance.  The  aggregate  fair
         value of these  warrants,  estimated to be $112,200,  was recorded as a
         discount to debt and amortized through the closing date of the Series D
         placement.  In November 1996,  the Company  issued an additional  2,803
         Series D warrants,  including 476 to a related  party,  in exchange for
         securing  equipment  lease lines of credit.  These warrants also had an
         exercise price of $8.56 per share,  were  immediately  exercisable  and
         expired ten years from the date of their  issuance.  Upon completion of
         the Company's  IPO, the Series D warrants  converted  into common stock
         warrants to purchase an aggregate of 34,053 shares of common stock.

         In May 1996,  the  Company  granted  options to members of an  Advisory
         Committee,  which included a member of the Board of Directors and three
         of the  Company's  stockholders,  to purchase an  aggregate  of 125,000
         shares of Series D. In April 1997, the Company  granted further options
         to two Advisory  Committee  member,  to purchase an aggregate of 50,000
         shares of Series D. All of the options were  exercisable  at a price of
         $8.56 per share,  expired  five years from the date of their  issuance,
         and became  immediately  exercisable  upon  completion  of the IPO. The
         Company has recognized  consulting expense in its results of operations
         of $363,500  and  $112,500  for the years ended  December  31, 1997 and
         1996, respectively.  Upon completion of the Company's IPO, the Series D
         options converted into common stock options to purchase an aggregate of
         175,000 shares of common stock.

         The  holders  of  the  Series  A,  B and C  were  entitled  to  receive
         noncumulative,  preferential annual dividends of $1.04, $1.76, and $.76
         per  share,  respectively,  when  and  if  declared  by  the  Board  of
         Directors. No such dividends were declared. In the event of liquidation
         of the Company,  the holders of Series A, B and C were entitled,  under
         certain  conditions,  to receive a distribution in preference to common
         stockholders equal to $12.80, $22.00 and $9.60 per share, respectively.
         During  1996,  certain  holders of Series A and B  converted  6,593 and
         11,364  shares,  respectively,  into an aggregate  of 21,548  shares of
         Series C. Upon  completion of the Company's  IPO, the Series A, B and C
         converted into an aggregate of 331,523 shares of common stock.

         At December 31, 1996, there were warrants outstanding to purchase up to
         7,876  shares of Series B at an  exercise  price of  $22.00,  and up to
         131,851  shares of Series C at an  exercise  price of $9.60 per  share.
         Upon  completion of the Company's  IPO, the Series B warrants  expired,
         and the  Series C  warrants  converted  into an  aggregate  of  131,851
         warrants to purchase shares of common stock.

8.       Employee Stock Options

         In 1991, the Board of Directors  approved the 1991 Incentive Stock Plan
         (the  "Plan")  which was  subsequently  amended and allows the Board to
         grant either incentive or non-qualified  stock options to the Company's
         employees or consultants.  The options generally expire five years

                                      F-15
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         from the date of grant.  Individuals  owning more than 10% of the total
         combined  voting  power of all  classes of stock of the Company are not
         eligible to participate in the Plan unless the option price is at least
         110% of the fair market value of the common stock at the date of grant.

         A summary of the activity under the stock option plan is as follows:

<TABLE>
<CAPTION>
                                                      Options                           Exercise
                                                   Available for       Shares Under       Price
                                                       Grant              Option        Per Share
                                                  --------------    -------------    ---------------

<S>                                                      <C>             <C>           <C>
Options outstanding at January 1, 1996                   40,075          199,119       $ .40-.96

Additional shares authorized                            125,000                -               -
Granted                                                 (82,357)          82,357             .96
Exercised                                                     -          (75,700)        .40-.96
Canceled                                                 53,976          (53,976)            .96
                                                  --------------    -------------    -----------

Options outstanding at December 31, 1996                136,694          151,800             .96

Additional shares authorized                          1,512,500                -               -
Granted                                                (791,999)         791,999        .96-6.00
Exercised                                                     -          (27,070)            .96
Canceled                                                 54,305          (54,305)       .96-6.00
                                                  --------------    -------------    -----------
                                                                                               -
Options outstanding at December 31, 1997                911,500          862,424       $.96-6.00
                                                  --------------    -------------    -----------

Options exercisable at December 31, 1997                                 198,682       $.96-6.00
                                                                    -------------    -----------
</TABLE>

         In 1997,  the Company  granted  23,750  non-qualified  stock options to
         consultants  and recognized  consulting  expense of $49,470  related to
         these options.

         The Company continues to account for stock options granted to employees
         under APB 25. In 1996, the Company  adopted SFAS No. 123 for disclosure
         purposes.  Because  options  granted to  employees in 1996 and 1997 had
         exercise  prices  equal to or greater than the fair market value of the
         underlying common stock at the respective grant dates, as determined by
         the Company's management,  compensation expense has not been recognized
         in results of  operations.  The pro forma impact of SFAS No. 123 on the
         Company's results of operations  related to options granted during 1997
         and 1996 would have been immaterial.

         In October  1997,  the Company's  Board of Directors  and  stockholders
         authorized an increase in the number of shares reserved for issuance to
         1,950,000 pursuant to the Plan.

                                      F-16

<PAGE>
CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

9.       Major Customers

         Sales to major customers, as a percentage of revenues, are as follows:
                               Year Ended                 Year Ended
                              December 31,               December 31,
                                  1997                       1996

            A                      -                         17%
            B                      -                         16%
            C                      -                         21%
            D                     65%                         -

         At December  31, 1997,  customer D  represented  64% of total  accounts
         receivable.

10.      Employee Benefits Plans

         The Company has a 401(k) savings plan (the "Savings Plan") covering all
         full-time  employees and  qualifying  part time  employees.  As allowed
         under Section  401(k) of the Internal  Revenue  Code,  the Savings Plan
         provides   tax-deferred   salary  reductions  for  eligible  employees.
         Employees  are  eligible  to  participate  after a ninety  day  service
         requirement.  Participants  may  make  voluntary  contributions  to the
         Savings Plan up to 20% of their compensation, subject to annual limits.
         The Savings Plan permits company contributions, however, none were made
         during the years ended December 31, 1997 and 1996.

11.      Obligations Under Capital and Operating Leases

         The Company is obligated  under capital leases for computers and office
         equipment  through  the  year  2001.  All  assets  leased  under  these
         agreements  have  been  capitalized  and the  related  obligations  are
         reflected  in the  accompanying  financial  statements  based  upon the
         present  value of future  minimum  lease  payments.  In  addition,  the
         Company  leases  its  office   facilities  and  certain  furniture  and
         equipment.  These  operating  leases are  noncancellable  and expire on
         various dates through 2004.


                                      F-17
<PAGE>
CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         The future minimum lease payments under capital and operating leases at
         December  31,  1997  and the  present  value of the net  minimum  lease
         payments are as follows:

                                                        Operating      Capital
         Year Ending December 31,                        Leases         Leases
                                                       ------------  -----------

         1998                                               445,755      258,461
         1999                                               443,346      221,197
         2000                                               354,974      159,628
         2001                                               363,021        5,329
         2002  and thereafter                             1,143,763            -
                                                       ------------  -----------

         Total minimum lease payments                  $  2,750,859      644,615
                                                       ------------

         Less: amounts related to interest                                90,816
                                                                     -----------

         Present value of net minimum lease payments                     553,799
         Less: obligation due within one year                            205,839
                                                                     -----------

         Long-term obligation under capital leases                   $   347,960
                                                                     -----------

         Included in the above are minimum capital lease payments of $61,691 due
         to a related party.

         During 1997, the Company refinanced certain equipment  purchased during
         1997 and at the end of 1996,  under a sale/leaseback  agreement.  These
         transactions  were  accounted for as  financings,  wherein the property
         remains  on  the  books  and  continues  to be  depreciated.  Financing
         obligations  representing  the proceeds  were  recorded and are reduced
         based upon payments under the lease over a 42 month period.

         In November 1996, the Company  entered into a $500,000  equipment lease
         line of credit. In December 1997, this agreement was amended to provide
         the  Company  with an  additional  $250,000  line of credit  under this
         facility,  with a three year  repayment  term. As of December 31, 1997,
         $189,000 was available under this line of credit.

         Rental expense under operating leases was $453,794 and $337,358 for the
         years ended December 31, 1997 and 1996, respectively.

                                      -18-

<PAGE>
CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

12.      Income Taxes

         The tax effect of temporary  differences  and  carryforwards  that give
         rise to significant portions of the deferred tax assets and liabilities
         at December 31, 1997 was:

                                                                   1997

         Deferred rent                                       $      107,573
         Accounts payable                                           289,368
         Accrued expenses                                           367,477
         Deferred revenues                                           12,014
         Customer advances                                          120,000
         Software cost expense                                      268,804
         Net operating loss carryforward                          8,801,171
         Research and experimental credit carryforwards             144,309
         Other deferred tax assets                                  469,287
                                                            ----------------

              Deferred tax assets                                10,580,003

         Depreciation                                               (55,750)
         Accounts receivable                                       (199,907)
         Prepaid expenses                                           (19,302)
                                                            ----------------

              Deferred tax liabilities                             (274,959)

         Net deferred tax assets                                 10,305,044
              Less: valuation allowance                         (10,305,044)
                                                            ----------------

         Net deferred tax assets                             $            -
                                                            ----------------

         The Company has  recorded a full  valuation  allowance  against its net
         deferred  tax  assets  since  management  believes  that based upon the
         available  objective  evidence  it is more  likely  than not that these
         assets will not be  realized.  The  difference  between  the  statutory
         federal tax rate and the Company's  effective tax rate is primarily due
         to the valuation allowance.

         As of  December  31,  1997,  the  Company  has net  operating  loss and
         research and  experimental  tax credit  carryforwards  of approximately
         $22,000,000  and  $144,000,  respectively,  available to offset  future
         federal  taxable  income and tax.  These  carryforwards  will expire at
         various dates through 2012.  Under Section 382 of the Internal  Revenue
         Code of 1986, as amended,  utilization  of prior net  operating  losses
         ("NOLs")  is  limited  after an  ownership  change,  as defined in such
         Section  382. As a result of previous  transactions  which  involved an
         ownership change as defined by Section 382, the Company will be subject
         to  limitation  on the use of its  NOLs.  Accordingly,  there can be no
         assurance  that a  significant  amount  of the  existing  NOLs  will be
         available to the Company.

                                      F-19
<PAGE>

CROSSZ SOFTWARE CORPORATION

NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


13.      Commitments

         Employment Agreements
         The Company has  entered  into  long-term  employment  agreements  with
         certain key members of management. The agreements provide each employee
         with base annual compensation and incentive  compensation  payable upon
         attaining  certain  corporate  targets  as  determined  by the Board of
         Directors. The agreements provide that in the event of the termination,
         other than for cause,  the  executives  will be entitled to between six
         and twelve months of severance.  The aggregate annual commitments under
         these  employment  agreements  are  $935,625  and $460,208 for 1998 and
         1999, respectively.

14.      Subsequent Events

         In January 1998,  the Company loaned $65,000 to an officer and director
         of the Company.  This  promissory  note has a term of 24 months bearing
         interest at 8% per annum.

         In January 1998, the Company  incorporated  a wholly-owned  subsidiary,
         QueryObject Systems Corporation ("QOS"), a Delaware Corporation.  It is
         the Company's intent, upon stockholder approval, to merge with QOS, and
         change the name of the Company  from  CrossZ  Software  Corporation  to
         QueryObject Systems Corporation.

         In March  1998,  the  Chairman  of the Board and officer of the Company
         tendered his  resignation  effective May 26, 1998. In conjunction  with
         the resignation  the Company agreed to provide twelve months  severance
         which will be paid over the period of one year.